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 February 10, 2023 issue of the Texas Register (48 TexReg 607) 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. The adopted amendment also addresses adjustments for scores and ratings upon appeal for the indicator for the timely submission of a complete annual financial report.

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 2022-2023 rating year and subsequent years. The adopted amendment also includes 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 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. At adoption, a change was made to specify that all school districts will be awarded the maximum points for Indicator 14 under School FIRST and that all charter schools will be awarded the maximum points for Indicator 15 under Charter FIRST.

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

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

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

Figure: 19 TAC §109.1001(e)(7)

The calculation for Indicator 5 has been revised to use total net position instead of unrestricted net position in the calculation, and the scoring for Indicator 5 has 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. In response to public comment, Indicator 5 was modified at adoption to allow school districts with a numeric growth indicator of 1,000 students in membership over five years to pass the indicator.

The statement that Indicator 10 will not be utilized for the 2021-2022 rating year has been deleted.

In response to public comment, Indicator 11 was modified at adoption to allow school districts with a numeric growth indicator of 1,000 students in membership over five years to pass the indicator.

In response to public comment, clarification has been 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, and the wording for Indicator 12 has been revised to read, "What is the correlation between future debt requirements and the district's assessed property value?"

The calculation for Indicator 13 has been 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 has been deleted.

Indicator 17 has been 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 has been 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 has been 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 has been deleted.

The calculation for Indicator 14 has been 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 has been deleted.

Indicator 18 has been 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 has been 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 has been removed as an indicator for Charter FIRST.

Adopted new §109.1001(n)(9)(A) and (B) has been 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.

SUMMARY OF COMMENTS AND AGENCY RESPONSES: The public comment period on the proposal began February 10, 2023, and ended March 13, 2023. Following is a summary of public comments received and corresponding agency responses.

School FIRST Indicator 5

Comment: Concerning proposed Figure: 19 TAC §109.1001(e)(7), the Texas Association of School Business Officials (TASBO) recommended that the agency amend the definition for fast-growing districts by adding a numeric growth indicator in addition to the current percentage-based calculation. Specifically, TASBO recommended that the agency revise Indicator 5 to recognize the growth of districts that either increase by 7% (students in membership) or that grow by at least 1,500 students over a five-year period.

Response: The agency agrees that a numeric growth indicator should be added to Indicator 5 as an alternative to pass the indicator. Instead of a 1,500 student growth indicator, however, the agency added a numeric growth indicator of 1,000 students in membership over five years to Indicator 5 to allow school districts to pass the indicator.

School FIRST Indicator 7

Comment: Concerning proposed Figure: 19 TAC §109.1001(e)(7), a school district administrator and the Texas Association of School Administrators (TASA) proposed that the agency consider making the cash/investment reserve scoring uniform among school districts and charter schools.

Response: The agency disagrees that the number of days of cash on hand required to receive 10 points for Indicator 7 should be adjusted to align with the number of days of cash on hand required for charter schools to receive 10 points. This indicator measures the number of days of expenses that could be paid from existing cash and cash equivalents. Charter schools have a lower cash threshold because they generally receive cash monthly in near equal amounts whereas school districts may not receive cash for several months, depending on their payment schedule, so they need to have larger cash reserves to ensure cash is available to meet expenses. Although charter schools may receive 10 points in Charter FIRST for having 60 or more days of cash on hand, only a range of 66% to 82% of charter schools over the past five rating years have had 60 or more days of cash on hand as compared to a range of 90% to 97% of school districts over the same period of time. Additionally, 80% to 93% of school districts have had 90 or more days of cash on hand over the past five rating years and received 10 points. The agency has maintained language as proposed concerning Indicator 7.

School FIRST Indicator 8

Comment: Concerning proposed Figure: 19 TAC §109.1001(e)(7), a school district administrator and TASA proposed that the agency consider making the current ratio scoring uniform among school districts and charter schools. The administrator also stated that using a lower liquidity threshold for charter schools may provide stakeholders with a false sense of financial stability. TASA stated that independent school districts are held to a higher standard under FIRST when measuring assets to liabilities to cover short-term debt.

Response: The agency disagrees that the current assets to current liabilities ratio required to receive 10 points for Indicator 8 should be adjusted to align with the ratio required for charter schools to receive 10 points. Charter schools have a lower ratio requirement because they generally receive cash monthly in near equal amounts whereas school districts may not receive cash for several months, depending on their payment schedule, so they need to have a greater amount of current assets to ensure their short-term obligations can be met. About 80% of school districts have had a current assets to current liabilities ratio of 3.0 or greater over the past five rating years and received the maximum points of 10 for the indicator. Charter schools may receive the maximum points of 10 points in Charter FIRST for having a current assets to current liabilities ratio of 2.0 or greater and a comparable range of 77% to 89% of charter schools have met that ratio over the past five rating years. The agency has maintained language as proposed concerning Indicator 8.

School FIRST Indicator 9

Comment: Concerning proposed Figure: 19 TAC §109.1001(e)(7), a school district administrator proposed that the agency consider making the days of cash on hand threshold uniform among school districts and charter schools. The administrator stated that Indicator 9 holds school districts to a higher standard than charter schools. The administrator stated that school districts that do not meet the initial measurement (revenues exceed expenditures) for Indicator 9 pass the indicator if the days of cash on hand is 60 or more while charter schools that do not meet the initial measurement pass the indicator if the days of cash on hand is 40 days or more.

Response: The agency disagrees that if the initial measure for Indicator 9 is not met and that the number of days of cash on hand required to receive the maximum points of 10 should be adjusted to align with the number of days of cash on hand required for charter schools to receive the maximum points of 5 points for Indicator 9 in Charter FIRST. Charter schools have a lower cash threshold because they generally receive cash monthly in near equal amounts whereas school districts may not receive cash for several months, depending on their payment schedule, so they need to have larger cash reserves to ensure cash is available to meet expenses. Additionally, almost all school districts, about 98%, receive the maximum points for Indicator 9 year after year. The agency has maintained language as proposed concerning Indicator 9.

School FIRST Indicator 10

Comment: Concerning proposed Figure: 19 TAC §109.1001(e)(7), a school district administrator commented that Indicator 10 will not result in an accurate depiction of districts' financial integrity because of dramatic changes to both district budgets and enrollments due to the coronavirus disease (COVID-19) beginning with school year 2019-2020 and extending through school year 2021-2022. The administrator stated that hold harmless was awarded to districts in all three years used to calculate the grade for the 2022-2023 FIRST rating. The administrator further stated that TEA suspended Indicator 10 in the current grading period due to challenges that student attendance projections and hold harmless state funding presented as a result of COVID-19 and that it makes sense to suspend it again for the FIRST grading year that will include all three COVID-19 years (2019-2020, 2020-2021, and 2021-2022).

Response: The agency agrees that Indicator 10 should not be evaluated for School FIRST rating year 2022-2023. The agency has maintained language as proposed concerning Indicator 10; however, all school districts will receive the maximum of 10 points for Indicator 10 for rating year 2022-2023.

School FIRST Indicator 11

Comment: Concerning proposed Figure: 19 TAC §109.1001(e)(7), TASBO recommended that the agency amend the definition for fast-growing districts by adding a numeric growth indicator in addition to the current percentage-based calculation. A school district administrator commented that fast-growing school districts receive a scoring reprieve, but using a percentage increase of students in membership does not accurately reflect the different circumstances of growing school districts. The administrator further commented that a school district's ability to rely on Interest and Sinking (I&S) tax revenues, likely from a growing tax base, to service new debt is not considered when scoring this indicator.

Response: The agency disagrees that Indicator 11 should be replaced with the ratio of debt to assessed value but agrees that a numeric growth indicator should be added as an alternative to pass the indicator. Instead of a 700 student growth indicator, however, the agency added a numeric growth indicator of 1,000 students in membership over five years to Indicator 11 to allow school districts to pass the indicator.

School FIRST Indicator 12

Comment: Concerning proposed Figure: 19 TAC §109.1001(e)(7), TASBO recommended that the agency use the I&S property value in the calculation for Indicator 12 for districts with Chapter 313 agreements, which will be higher than the Maintenance & Operations value and which TASBO believes is a better reflection of the district's ability to pay. TASBO also recommended Indicator 12 be reworded because the current wording implies that districts that lose points on this indicator may be at risk of debt default. Additionally, TASBO recommended that enrollment growth be factored into the calculation for Indicator 12 with different ranges of points for districts that are growing rapidly as compared to other districts.

Response: The agency disagrees that enrollment growth should be factored into the calculation for Indicator 12 with different ranges of points but agrees that the I&S property value should be used in the calculation. The agency modified Figure: 19 TAC §109.1001(e)(7) at adoption to specify the I&S value as the assessed property value that is used in the calculation for Indicator 12 for all school districts. Additionally, the agency reworded Indicator 12 to read, "What is the correlation between future debt requirements and the district's assessed property value?"

School FIRST Indicator 13

Comment: Two administrators and TASA commented that the administrative cost ratio scoring criteria is unfair and should be uniform among school districts and charter schools.

Response: The agency disagrees that administrative cost ratio scoring should be uniform between school districts and charter schools primarily because of economies of scale that are generally experienced by school districts having a greater number of students. The agency has maintained language as proposed concerning Indicator 13.

School FIRST Indicator 15

Comment: Concerning proposed Figure: 19 TAC §109.1001(e)(7), a school district administrator commented that Indicator 15 will not result in an accurate depiction of districts' financial integrity because of dramatic changes to enrollments due to COVID-19 beginning with school year 2019-2020 and extending through school year 2021-2022. The administrator proposed that Indicator 15 be suspended for the 2022-2023 rating year.

Response: The agency agrees that Indicator 15 should not be evaluated for School FIRST rating year 2022-2023. The agency has maintained language as proposed concerning Indicator 15; however, all school districts will receive the maximum of 5 points for this indicator for rating year 2022-2023.

School FIRST Indicator 20

Comment: Concerning proposed Figure: 19 TAC §109.1001(e)(7), TASA commented that under the proposed changes, independent school district (ISD) administrators and trustees would be required to discuss any changes and/or impact to local, state, and federal funding at a publicly held school board meeting within 120 days prior to the district adopting its budget to receive points under FIRST and that there is no corresponding requirement for charter schools. TASA stated that charter school boards should be accountable to all taxpayers who fund their schools and hold public meetings in the same manner and circumstances as community-based ISDs, including when their FIRST rating changes.