The Texas Education Agency (TEA) proposes an amendment to §109.1001, concerning financial accountability ratings. The proposed amendment would update 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. The proposed amendment would also address adjustments for scores and ratings upon appeal for the indicator for the timely submission of a complete annual financial report.

BACKGROUND INFORMATION AND 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 proposed amendment would clarify the financial accountability rating indicators terminology used to determine each school district's and charter school's rating for the 2022-2023 rating year and subsequent years. The proposed amendment would also include some pandemic-related adjustments to the Financial Integrity Rating System of Texas (FIRST) based on TEC, §39.082(b) and (d), which require that the FIRST system include uniform indicators that measure the financial management performance and future financial solvency of a school district or open-enrollment charter school and that the commissioner of education evaluate indicators at least once every three years. Consequently, all school districts will pass indicator 5 and be awarded the maximum points for indicators 10 and 15 for School FIRST; all charter schools will be awarded the maximum points for indicators 10 and 16 under Charter FIRST; and certain federal funds will be added to the administrative cost ratio calculation for indicator 13 for School FIRST and indicator 14 for Charter FIRST.

Proposed new subsection (e)(7) would be added, including new Figure: 19 TAC §109.1001(e)(7) that would clarify terminology and calculations for School FIRST indicators for years subsequent to the 2021-2022 rating year.

Proposed new subsection (f)(7) would be added, including new Figure: 19 TAC §109.1001(f)(7) that would clarify terminology and calculations for Charter FIRST indicators for years subsequent to the 2021-2022 rating year.

The worksheets, dated June 2023, would differ from the current worksheets, dated October 2021, as follows.

Figure: 19 TAC §109.1001(e)(7)

The calculation for indicator 5 would be revised to use total net position instead of unrestricted net position in the calculation, and the scoring for indicator 5 would be changed from a critical pass or fail indicator with a ceiling for passing only the second part of the indicator to a ceiling indicator for both parts.

The wording for indicator 5 would be revised to read, "Was the total net position in the governmental activities column in the Statement of Net Position (net of accretion of interest for capital appreciation bonds, net pension liability, and other post-employment benefits) greater than zero? (If it is not, the maximum points and highest rating that the school district may receive is 79 points, C = Meets Standard Achievement, unless the school district has an increase of students in membership over 5 years of 7 percent or more. If the school district has an increase of students in membership over 5 years of 7 percent or more, the maximum points and highest rating that the school district may receive is 89 points, B = Above Standard Achievement.)"

The statement that indicator 10 will not be utilized for the 2021-2022 rating year would be deleted.

Clarification would be added to indicator 12 to specify that the interest and sinking value will be used as the assessed property value in the calculation for indicator 12.

The calculation for indicator 13 would be revised to include funds 266, 281, 282, and 283 in the calculation for the administrative cost ratio.

The statement that indicator 15 will not be utilized for the 2021-2022 rating year would be deleted.

Indicator 17 would be revised to include the auditor's disclosure of substantial doubt about the school district's ability to continue as a going concern. The wording for indicator 17 would be revised to read, "Did the external independent auditor report that the AFR was free of any instance(s) of material weakness in internal controls over financial reporting and compliance for local, state, or federal funds and free from substantial doubt about the school district's ability to continue as a going concern? (The AICPA defines material weakness.) (If the school district fails indicator 17, the maximum points and highest rating that the school district may receive is 79 points, C = Meets Standard Achievement.)"

Indicator 20 would be revised to read, "Did the school district's administration and school board members discuss any changes and/or impact to local, state, and federal funding at a board meeting within 120 days before the district adopted its budget?"

Figure: 19 TAC §109.1001(f)(7)

The statement that indicator 10 will not be utilized for the 2021-2022 rating year would be deleted.

The calculation for indicator 14 would be revised to add funds 266, 281, 282, and 283 in the calculation for the administrative cost ratio.

The statement that indicator 16 will not be utilized for the 2021-2022 rating year would be deleted.

Indicator 18 would be revised to include the auditor's disclosure of substantial doubt about the charter school's ability to continue as a going concern. The wording for indicator 18 would be revised to read, "Did the external independent auditor report that the AFR was free of any instance(s) of material weakness in internal controls over financial reporting and compliance for local, state, or federal funds and free from substantial doubt about the charter school's ability to continue as a going concern? (The AICPA defines material weakness.) (If the charter school fails indicator 18, the maximum points and highest rating that the charter school may receive is 79 points, C = Meets Standard Achievement.)"

Indicator 21 would be removed as an indicator for Charter FIRST.

Proposed new §109.1001(n)(9)(A) and (B) would be added to describe adjustments for scores and ratings upon appeal for the indicator for the timely submission of a complete annual financial report, which is currently indicator 1 for School FIRST and Charter FIRST.

FISCAL IMPACT: James Terry, associate commissioner for school finance, has determined that for the first five-year period the proposal is in effect, there are no additional costs to state or local government, including school districts and open-enrollment charter schools, required to comply with the proposal.

LOCAL EMPLOYMENT IMPACT: The proposal has no effect on local economy; therefore, no local employment impact statement is required under Texas Government Code, §2001.022.

SMALL BUSINESS, MICROBUSINESS, AND RURAL COMMUNITY IMPACT: The proposal has no direct adverse economic impact for small businesses, microbusinesses, or rural communities; therefore, no regulatory flexibility analysis, specified in Texas Government Code, §2006.002, is required.

COST INCREASE TO REGULATED PERSONS: The proposal does not impose a cost on regulated persons, another state agency, a special district, or a local government and, therefore, is not subject to Texas Government Code, §2001.0045.

TAKINGS IMPACT ASSESSMENT: The proposal does not impose a burden on private real property and, therefore, does not constitute a taking under Texas Government Code, §2007.043.

GOVERNMENT GROWTH IMPACT: TEA staff prepared a Government Growth Impact Statement assessment for this proposed rulemaking. During the first five years the proposed rulemaking would be in effect, it would expand an existing regulation by clarifying terminology used to define FIRST indicators and describing adjustments for certain scores and ratings upon appeal.

The proposed rulemaking would not create or eliminate a government program; would not require the creation of new employee positions or elimination of existing employee positions; would not require an increase or decrease in future legislative appropriations to the agency; would not require an increase or decrease in fees paid to the agency; would not create a new regulation; would not limit or repeal an existing regulation; would not increase or decrease the number of individuals subject to its applicability; and would not positively or adversely affect the state's economy.

PUBLIC BENEFIT AND COST TO PERSONS: Mr. Terry has determined that for each year of the first five years the proposal is in effect, the public benefit anticipated as a result of enforcing the proposal would be ensuring that the provisions of the financial accountability rating system align to make the indicators uniform for all school districts and charter schools and would provide a fair and equitable rating system for all school districts and charter schools. There is no anticipated economic cost to persons who are required to comply with the proposal.

DATA AND REPORTING IMPACT: The proposal would have no data and reporting impact.

PRINCIPAL AND CLASSROOM TEACHER PAPERWORK REQUIREMENTS: TEA has determined that the proposal would not require a written report or other paperwork to be completed by a principal or classroom teacher.

PUBLIC COMMENTS: The public comment period on the proposal begins February 10, 2023, and ends March 13, 2023. A request for a public hearing on the proposal submitted under the Administrative Procedure Act must be received by the commissioner of education not more than 14 calendar days after notice of the proposal has been published in the Texas Register on February 10, 2023. A form for submitting public comments is available on the TEA website at https://tea.texas.gov/About_TEA/Laws_and_Rules/Commissioner_Rules_(TAC)/Proposed_Commissioner_of_Education_Rules/.

STATUTORY AUTHORITY. The amendment is proposed under Texas Education Code (TEC), §12.104, as amended by Senate Bill (SB) 1365, 87th Texas Legislature, Regular Session, 2021, which subjects open-enrollment charter schools to the prohibitions, restrictions, or requirements relating to public school accountability and special investigations under TEC, Chapter 39, Subchapters A, B, C, D, F, G, and J, and TEC, Chapter 39A;TEC, §39.082, which requires the commissioner to develop and implement a financial accountability rating system for public schools and establishes certain minimum requirements for the system, including an appeals process; TEC, §39.083, which requires the commissioner to include in the financial accountability system procedures for public schools to report and receive public comment on an annual financial management report; TEC, §39.085, which requires the commissioner to adopt rules to implement TEC, Chapter 39, Subchapter D, which addresses financial accountability for public schools; TEC, §39.087, as added by House Bill 1525, 87th Texas Legislature, Regular Session, 2021, which requires the commissioner to adjust the financial accountability rating system under TEC, §39.082, to account for the impact of financial practices necessary as a response to the coronavirus disease (COVID-19) pandemic, including adjustments required to account for federal funding and funding adjustments under TEC, Chapter 48, Subchapter F; and TEC, §39.151, as amended by SB 1365, 87th Texas Legislature, Regular Session, 2021, which requires the commissioner to provide a process by which a school district or an open-enrollment charter school can challenge an agency decision related to academic or financial accountability under TEC, Chapter 39, including a determination of consecutive school years of unacceptable performance ratings. This process must include a committee to make recommendations to the commissioner. These provisions collectively authorize and require the commissioner to adopt the financial accountability system rules, which implement each requirement of statute applicable to school districts and open-enrollment charter schools.

CROSS REFERENCE TO STATUTE. The amendment implements Texas Education Code, §§12.104, as amended by Senate Bill (SB) 1365, 87th Texas Legislature, Regular Session, 2021; 39.082; 39.083; 39.085; 39.087, as added by House Bill 1525, 87th Texas Legislature, Regular Session, 2021; and 39.151, as amended by SB 1365, 87th Texas Legislature, Regular Session, 2021.