(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 December 31, 2021, 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 September 3, 2021, issue of the Texas Register (46 TexReg 5524) and will be republished. The adopted amendment updates financial accountability rating information and rating worksheets for school districts and open-enrollment charter schools, including adjustments required under Texas Education Code (TEC), §39.087, as added by House Bill (HB) 1525, 87th Texas Legislature, Regular Session, 2021.

REASONED JUSTIFICATION: Section 109.1001 includes the financial accountability rating system and rating worksheets that explain the indicators that 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 or an open-enrollment charter school is to report to parents and taxpayers in the district.

The adopted amendment clarifies the financial accountability rating indicators terminology used to determine each school district's and charter school's rating for the 2020-2021 rating year and subsequent years by revising the ratings worksheet calculations in §109.1001(e)(5) and (f)(5). The adopted amendment also includes terminology clarifications to the rating worksheets in §109.1001(e)(5) and (f)(5). The worksheets, dated October 2021, differ from the current worksheets, dated April 2020, as follows.

Figure: 19 TAC §109.1001(e)(5)

A statement has been added that Indicator 5 will not be utilized for the 2020-2021 rating year.

Indicator 15 has been revised to clarify terminology that aligns with the calculation used to score the indicator when the average daily attendance of the school district is greater than the allotted range. The "Determination of Points" chart in the worksheet was revised to add the arithmetic symbol for "less than or equal to" to each of the ratios disclosed in the allotted range table of Indicator 15.

The "Determination of rating based on meeting ceiling criteria" description section was revised to remove the word "on" from the description of ceiling Indicator 5 to provide greater clarity of the indicator's description.

At adoption, Figure: 19 TAC §109.1001(e)(5) was modified to remove the duplicative term "hold" from the calculation for Indicator 15.

Figure: 19 TAC §109.1001(f)(5)

Indicator 13 was revised to remove the use of unrestricted net assets in the calculation and insert the use of total net assets in the calculation.

A statement was added that Indicator 21 will not be utilized for the 2020-2021 rating year.

In response to public comment, the following changes were made at adoption.

New subsection (e)(6) was added, including new Figure: 19 TAC §109.1001(e)(6) that clarifies terminology and calculations for School FIRST indicators for years subsequent to the 2020-2021 rating year. The worksheet states that Indicators 10 and 15 will not be utilized for the 2021-2022 rating year.

New subsection (f)(6) was added, including new Figure: 19 TAC §109.1001(f)(6) that clarifies terminology and calculations for Charter FIRST indicators for years subsequent to the 2020-2021 rating year. The worksheet states that Indicators 10, 16, and 21 will not be utilized for the 2021-2022 rating year. In addition, the data source for Indicator 10 does not include the revenue object code 57XX series in the calculation for the indicator, and references to the "Charter School AFR Data Template" as the source of data for certain data elements for Indicators 6, 7, 9, and 12 are not included because TEA will no longer use the template as a source of data for the elements.

SUMMARY OF COMMENTS AND AGENCY RESPONSES: The public comment period on the proposal began September 3, 2021, and ended October 4, 2021. Following is a summary of public comments received and agency responses.

School FIRST Indicator 7

Comment: Concerning proposed Figure: 19 TAC §109.1001(e)(5), a school district employee commented that recapture payments made by a school district should be excluded from the operating cost calculation for Indicator 7 for School FIRST. The school district employee stated that taxes flow in and flow out via recapture payments by August 15. Additionally, the school district employee stated that recapture is not an operating cost, but it is treated as such in the calculation for Indicator 7 and causes districts that have a large recapture percentage to have a much higher requirement for days of cash on hand. The school district employee further stated that this punitive aspect is unlikely to have been the legislative intent.

Response: The agency disagrees that recapture payments should be excluded from the days of cash on hand and current investments calculation for Indicator 7 (Was the number of days of cash on hand and current investments in the general fund for the school district sufficient to cover operating expenditures (excluding facilities acquisition and construction)?). The days of cash on hand and current investments calculation allows the agency to determine with a reasonable degree of certainty that a school district is maintaining sufficient cash on hand to pay its short-term expenditures. Furthermore, school districts that have local revenue in excess of entitlement are legally obligated to reduce their revenue level under TEC, Chapter 49, and one option is through making recapture payments. The agency has maintained language as proposed concerning Indicator 7 in Figure: 19 TAC §109.1001(e)(5).

School FIRST Indicators 10 and 15

Comment: Concerning proposed Figure: 19 TAC §109.1001(e)(5), a school district employee commented that neither Indicator 10 nor Indicator 15 for School FIRST will result in an accurate depiction of school districts' financial integrity because of dramatic changes to school district budgets and enrollment due to COVID-19 beginning with the 2019-2020 school year and extending through the 2020-2021 school year. The school district employee proposed that Indicator 10 be removed from the FIRST rating or that final budgeted amounts be used in the calculation for the indicator.

Regarding Indicator 10, the school district employee stated that a comparison of budgeted revenues submitted via the Public Education Information Management System (PEIMS) in October can vary significantly from actual revenues in August. The employee provided two examples for the variance from the employee's own school district: an unexpected COVID hold harmless funding that impacted the school district's ability to meet the requirements for Indicator 10 and a lawsuit from its major taxpayer lasting four years. The school district employee stated that these incidents affected the district's 2018-2019, 2019-2020, and 2020-2021 school years and could not have been predicted prior to adopting a budget. The school district employee further stated that Indicator 10 punishes school districts when unavoidable circumstances occur.

Regarding Indicator 15, the school district employee stated that Indicator 15 could result in a loss of points because of an unanticipated loss of students due to COVID. Additionally, the school district employee stated that districts were required to file attendance projections in 2018 for the 2019-2020 and 2020-2021 school years and that no school district could have known that COVID was coming and the impact that it would have on enrollment and attendance. The school district employee also stated that even though school districts were held harmless, there could still potentially be some skewed results for this indicator.

Response: The agency disagrees that Indicator 10 (Did the school district average less than a 10 percent variance (90% to 110%) when comparing budgeted revenues to actual revenues for the last 3 fiscal years?) and Indicator 15 (Was the school district's ADA within the allotted range of the district's biennial pupil projection(s) submitted to TEA? If the district did not submit pupil projections to TEA, did it certify TEA's projections?) should be removed from the School FIRST rating for years that have not been impacted by a widespread calamity and disagrees that the final budget should be used in the calculation for Indicator 10 instead of a school district's approved budget submitted through the PEIMS fall collection. Using the budget collected through PEIMS provides a uniform method of collection for the agency at a consistent time for the calculation for Indicator 10. Additionally, the agency maintains that Indicators 10 and 15 are predictive indicators for financial stability and that inaccurate pupil projections can prevent school districts from creating accurate budgets, which can lead to cash flow problems and possible financial insolvency. The agency has maintained language as proposed concerning Indicators 10 and 15 in Figure: 19 TAC §109.1001(e)(5). However, the agency has decided to not score Indicators 10 and 15 for the 2021-2022 rating year. Therefore, Figure: 19 TAC §109.1001(e)(6), which discloses indicators for the 2021-2022 rating year, was added at adoption. A note was added to Indicators 10 and 15 that states, "This indicator will not be utilized for the 2021-2022 rating year."

Comment: The Texas Public Charter Schools Association (TPCSA) requested that TEA modify and expand 19 TAC §109.1001(n) to waive or provide relief to any Charter FIRST indicator if the charter school can demonstrate that unforeseen circumstances related to the pandemic adversely impacted the indicator. TPCSA further commented that the rule will be used for subsequent years and that it is necessary to highlight an important concern that exists now and will continue beyond the pandemic.

Response: The agency agrees that adjustments should be made to the financial accountability rating system when unforeseen circumstances occur that adversely impact FIRST scores. These adjustments are allowed for under TEC, §39.087, COVID-19 Adjustment for Financial Accountability, and TEC, §39.082, Development and Implementation, which allows charter schools and school districts to submit additional information regarding FIRST indicators under subsection (g).

Charter FIRST Indicator 5

Comment: Concerning proposed Figure: 19 TAC §109.1001(f)(5), TPCSA urged the agency to consider a full waiver or other relief for Indicator 5 for Charter FIRST. TPCSA stated that the proposed rule waived this indicator for traditional school districts for the 2020-2021 School FIRST rating year and requested that a similar waiver be applied for Indicator 5 for charter schools. Schulman, Lopez, Hoffer and Adelstein, LLP also requested that the agency exclude Indicator 5 from Charter FIRST in Figure: 19 TAC §109.1001(f)(5). The law firm stated that Indicator 5 was excluded for school districts and that not waiving Indicator 5 for charter schools goes against the directive of TEC, §39.082, to create a financial accountability rating system to distinguish among school districts and open-enrollment charter schools based on level of financial performance.

Response: The agency disagrees that Indicator 5 (Was the total unrestricted net position balance (Net of the accretion of interest for capital appreciation bonds) in the governmental activities column in the Statement of Net Position greater than zero? (If the school district's increase of students in membership over 5 years was 7 percent or more, then the school district passes this indicator.)) should be waived for charter schools. The agency agrees that Indicator 5 for School FIRST was not scored for the 2020-2021 School FIRST ratings. The agency's decision to not score Indicator 5 was based on the significant impact of the implementation of Governmental Accounting Standards Board (GASB) 68 and 75 on school districts' net position balance. Nonprofit charter schools are not subject to GASB. Additionally, 99% of charter schools met the requirements to pass Indicator 5 for the 2020-2021 Charter FIRST ratings by having a positive total net assets balance or at least a 7% growth in student membership over five years or year over year for new charter schools. The agency has maintained language as proposed concerning Indicator 5 in Figure: 19 TAC §109.1001(f)(5).

Charter FIRST Indicator 7

Comment: Concerning proposed Figure: 19 TAC §109.1001(f)(5), TPCSA urged the agency to consider a full waiver or other relief for Indicator 7 for Charter FIRST. TPCSA stated that charter schools were offered Elementary and Secondary School Emergency Relief (ESSER), Federal Emergency Management Agency (FEMA), and other state and federal funds and that much of the funding was delayed and may have been included in accounts receivable. Additionally, TPCSA stated that this could result in lower cash on hand while accounts receivable is higher. TPCSA also stated that there were unanticipated pandemic-related expenditures to establish virtual schools or acquire personal protective equipment (PPE). TPCSA commented that Indicator 7 is a ceiling indicator and can adversely impact Charter FIRST ratings.

Schulman, Lopez, Hoffer and Adelstein, LLP also requested that the agency exclude Indicator 7 from Charter FIRST in Figure: 19 TAC §109.1001(f)(5) because many charter schools were required to spend significant funds out of cash on hand to implement mitigation measures such as ensuring sufficient space for distancing, providing adequate technology for remote learning, and more. The law firm requested that the agency create an exception that would allow charter schools to submit documentary evidence of the impact of the pandemic on cash on hand and award points for Indicator 7 upon submission of sufficient evidence.

Response: The agency disagrees that Indicator 7 (Was the number of days of cash on hand and current investments for the charter school sufficient to cover operating expenses?) should be waived. Additionally, the results of the calculation for Indicator 7 yields 0, 2, 4, 6, 8, or 10 points in the Charter FIRST scoring system. While the agency agrees that charter schools may have had unanticipated pandemic-related expenditures that could cause a lower number of days of cash on hand and current investments, recording anticipated funding in accounts receivable does not impact the number of days of cash on hand calculation. Charter schools received funding based on a hold harmless amount and in many cases received additional funding. The agency has maintained language as proposed concerning Indicator 7 in Figure: 19 TAC §109.1001(f)(5). The agency agrees that adjustments should be made to the financial accountability rating system when unforeseen circumstances occur that adversely impact FIRST scores. These adjustments are allowed for under TEC, §39.087 and §39.082, which allows charter schools and school districts to submit additional information regarding FIRST indicators under subsection (g).

Charter FIRST Indicator 10

Comment: Concerning proposed Figure: 19 TAC §109.1001(f)(5), TPCSA urged the agency to consider a full waiver or other relief for Indicator 10 for Charter FIRST and suggested changing Indicator 10 to consider only budgeted state revenue (FSP, fund code 420) and not local revenue.

TPCSA stated that budgeted revenue may vary from actual revenue because of increasing or declining enrollment or attendance and virtual options, new and changing TEA hold harmless calculations and guidance, and the influx of ESSER, state, and FEMA funds; donations/gifts; grants; and other funding. TPCSA further commented that this indicator penalizes charter schools that receive unanticipated gifts or donations.

TPCSA stated that the current calculation of Indicator 10 contradicts the legislative intent of TEC, §39.082(b), to "measure the financial management performance and future financial solvency" and that the indicator penalizes not only charter schools that might not be financially solvent but also those that end up being more financially successful than they anticipated in their budget.

TPCSA added that many charter schools receive unexpected revenue in the form of donations, gifts, federal and state funding, and philanthropic competitive and non-competitive grants and that accepting these gifts can result in more than a 10% revenue variance, violating Indicator 10. TPCSA stated that Charter FIRST should not discourage charter schools from applying for or receiving revenue from these sources. Additionally, TPCSA stated that Indicator 10 inappropriately penalizes charter schools that receive restricted grants or donations because they are not counted in revenue while unrestricted gifts are counted.

Lastly, TPCSA commented that Indicator 10 appears to inappropriately treat charter schools as if they receive local tax revenue in the same manner as traditional school districts and that local revenue for school districts is generated from local property taxes, which are stable and can be estimated and budgeted in advance, while local revenue for charter schools is often unexpected and much more difficult to estimate and budget.

Schulman, Lopez, Hoffer and Adelstein, LLP also requested that the agency exclude Indicator 10 from Charter FIRST in Figure: 19 TAC §109.1001(f)(5) because the COVID-19 pandemic seriously inhibited charter schools' ability to accurately predict enrollment, average daily attendance (ADA), and revenues for the 2020-2021 school year. The law firm stated that charter schools whose ADA estimations and budgeted revenue were less accurate because of the impact of the COVID-19 pandemic will be punished for those estimations for two years into the future because the indicator considers three years of budget variances. The law firm further stated that this indicator adversely and punitively affects small and new charter schools for impacts of the pandemic outside their control. The law firm requested that the agency create an exception that would allow charter schools to submit documentary evidence of the impact of the pandemic on losses in enrollment and ADA and award points for this indicator or exclude the indicator when supported by documentation.