This document is a work in process - more to be added at the bottom of this document in a few days.
vj - July 21, 2008 (Just attended another 3 hours District budget workshop).
School District Budgets - The Lake County School District has a NEW website, and lots of new stuff is on it. If you look in the Finance Dept., they now have the current 2007-08 annual budget (a very brief 15 page summary), plus the long missing monthly budget summaries. Additionally, I attended a Board workshop yesterday which was one of a series reviewing revisions to the next year's budget. The School budget year starts in July, so they still are working on the budget that just started.
Here are my comments about the budgets and the workshop...I have been putting this off because government "fund account" budgeting is a black magic system that results in brain strain on everyone. My opinion is that you can't blame elected officials for not understanding the budgets when degreed accountants can go blind trying to decipher them. I actually think there is a retirement home in Florida for old fund accountants who went senile after trying to explain fund accounting to department managers. It has been this way for decades, going back to when I started work as an auditor at the County of Los Angeles. You cannot compare accounting and budget methods used by businesses to government fund accounting.
A) Understanding the Financial Reporting & Budgeting Systems Used in Businesses vs the School District - In businesses, they normally start out with a "financial" centric accounting system devised by a CPA who is used to creating monthly and annual financial statements that meet accounting standards called "GAAP" (Generally Accepted Accounting Principles). It includes a balance sheet, income statement and others. The balance sheet shows the value of assets and liabilities owned by the business, and it can be used to develop ratios to show how much assets (such as buildings or inventory) can be used as collateral for loans or stock holders. In government, there are no plans to provide collateral, so the emphasis is on future, guaranteed income streams like tax revenues. Thus the School District's annual "financial statements" meet a government standard called the CAFR (Comprehensive Annual Financial Report). CLICK HERE to see recent Lake County CAFR's.
Unlike Corporations, which usually issue their annual audited financial statements within 30 days of year end, government standards let them take NINE MONTHS to publish audited statements. Thus, if the fiscal year ended on June, 30, 2008, don't expect to see the School District CAFR until March, 2009. Thus, the CAFR is USELESS for financial analysis to modify spending or budgets for the new fiscal year. My discussions with one financial manager yielded the fact that the CAFR is only usefull to provide to bond issuers, and it is not used for business or operational analysis. If you look at a CAFR for Lake Schools for 2007, it is dated May 21, 2008 or 11 months after the fiscal year end, and is 12mb and 145 pages. It is out of date and not very useful to analyze operational productivity vs a corporate report. There is no excuse for issuing a financial statement so late. But, this document is about budgets, so we won't spend time on the CAFR.
Next, most corporations expand their "financial statements" into cost accounting and operational analysis reports to evaluate productivity of operations. Problems occur if they have a CPA Controller who doesn't understand or create them. In those cases, the smarter departmental managers will create their own cost accounting and operational analysis reports, and their data may not reconcile with data from the CPA's report. This is common in organizations that have CPA's as controllers. In one case, I directed an operational audit of the $26-million race car operation of Nissan in the early 1990's. That group was run by the marketing department and had a CPA Controller who came from the Savings & Loan Industry. She didn't understand cost accounting, and relied on standard financial reports. She and her staff also didn't like to deal with the sophisticated engineers running operations, and didn't go into the fabrication shop. Thus, they booked $23-million of race car parts as inventory (for the balance sheet) which was all obsolete. Race car part tecnology changes almost monthly, and her inventory had no value. Interestingly, the engineer managers had more accurate cost accounting and analysis, and knew not to include the obsolete parts in their cost analysis, but they used it internally, while the Controller's data was sent to corporate to show return on investment. The Nissan CFO shut down the race car operation since the write off was almost as much as a full year's budget.
Thus, in local governments, like the School District, we have the useless financial standard reports (CAFR) and arcane budgets (fund accounting - see below), but no real evidence of public publishing of operational analysis reports to show productivity of operations. Examples would be cost per student for maintenance, budgeted costs per student, etc.
The focus of this paper then is on understanding weaknesses of the existing School District budgets, and the need for revisions to the format.
B) The Annual School District Budget - First, most local governments, including the School District, use fund accounting and budgeting. So, if you download the annual 2008 budget for the Lake County School District, you will find NO recap or consolidation of the total budget with totals, but a series of two pages for each of several "funds" defined by revenue source and use. The first two pages are for the main "General Fund 100" and show estimated revenues from many different tax sources, PLUS it shows a transfer of $11-million in from the Capital Project fund. The grand total of estimated revenues and other sources is $329,159,554. The second page shows the "appropriations" or planned expenses for each of about 20 departmental account numbers, such as Pupil Transportation services, Instructional Media Services, and the big one for $208-million, "Instruction" (teachers).
Scrolling down the portrait, then landscape format pages, we see other funds, like Food Services (410) which was slated to receive dedicated revenues of $16-million PLUS a carry forward balance from the prior 2007 year of $3.6-million, resulting in a total Food Services 2008 budget of $19.6-million. Interestingly, in this period of budget crunch, the planned appropriations equaled the new revenues, leaving $3.5-million to carry over to the 2009 budget year. That carry forward balance is 21% of the $16-million in spending, which is a big cushion. That could be justified, depending on the risk that any of the funding sources drop significantly, but you don't know for sure unless you analyze the history for each of the fund sources over the last 5-10 years.
When I see a big reserve, or cushion like this, it sends up red flags that departments are hoarding funds that could be used elsewhere or shifted into another account later without disclosure.
Terms: The budget uses "revenues" to describe sources of funds, like bonds, taxes, donations, fees, etc. They use the term "appropriations" to describe what I might call planned expenditures. If a department has been appropriated $1-million, that means it is planned, but not yet "committed". Committed means when a contract or purchase order is approved that "encumbers" (or assigns) the funds so they can't be shifted to another expense. It is common in larger governments (like USAID for foreign aid) to issue a LARGE contract to a vendor for a huge amount to encumber the funds, then if the governing elected officials (like Congress) tries to shift the funds in mid-year, they can be told it can't be done because the funds are encumbered by a contract. Then, the amateur managers who only encumbered funds as needed would lose out and most funds would be taken from them. I don't see much of this in local governments, but it may exist. The final term in the budget process is "paid" or spent, indicating the funds have been paid out to employees or vendors. Thus, if you have a budget that shows appropriations, but not many encumbrances, the governing officials could modify the budget and shift appropriations to another department. I don't know if there is a formal process to do this in the School District, but there should be one at the end of each quarter.
Now, what is confusing is since there is not a consolidated table for total funds and appropriations by account number in the Lake School District annual budget, you can't look at any one page and see the grand appropriations total for Instruction or other departments like Pupil Transportation Services. One fund could go up, and another down, and there is no easy way to see the total change by account.
ANOTHER MAJOR WEAKNESS in this report format is that it doesn't show prior year's budget and actual figures, or five year trends, so you can't see that the current budget is up or down and by what percent from prior years. If, for instance, in 2007, there was a big single year revenue jump from one funding source, and that source dropped this year by 80%, we should be able to see that and know that this year's appropriations should NOT be based on last year's budget.
You also have no percent change column, which would show how funding or appropriations changed from prior year and prior five year averages. And, a business would include a column showing appropriation amount per student, so you could see if a budgeted area was up or down
Recommendations for a Revised Annual District Summary Budget
1. Add Top Schedule that Shows Consolidated Totals for all Funds - There should be a top section that consolidates funding sources and appropriations by the same accounts in the details, thus we can see the grand total of funds dedicated to Instruction.
2. Add a Column Showing Percent of total for each account - For instance, if the grand total budget is $700-million, what percentage of that total is for Instruction, General Administration, etc.
3. Add columns that show prior year, and prior five year averages for each account. - Using the current, confusing format, you cannot easily tell if the current budget is a minimal increase, or big change from the prior year and prior five year average.
4. Add Columns that show Dollar Changes from Prior year and Prior Five year Averages - Without that, you can't easily tell if the account's dollar amount change is significant or not.
5. Add Columns for Each Main Department Account that Show Amount per Student for this budget, as well as prior year and prior five year average - Without this, you can't tell if a budget area is being overfunded or starved based upon student census numbers.
6. Somewhere, there should also be a page with Total Budget Appropriation per Employee Section for current, prior and prior five year averages - Staff should ensure statistics also show cost per outside services, so that shifting work from staff to outside consultants results in an adjustment to the ratios. Some organizations who really good ratios of costs per employee because they distort the numbers by outsourcing lots of work.
7. Non-Routine Expenses Like Capital Projects and One Project Grants Should be Recapped in a Separate Section from Routine Operating Expenses and Appropriations. For example, by including High School construction costs, supplies, labor, or "debt service funds" in a grand total will distort tracking ratios. Thus routine, normal expenses should be separate from non-routine or project specific expenses. Our preference is to disclose routine operating accounts at the top of a schedule, with a sub-total, then a section with non-routine expenses that are NOT included in operating ratios.
8 If this does not exist, establish a quarterly budget review to modify planned appropriations as needed to match actual revenue and expenditure trends. Ensure a policy exists to allow flexibility and prevent some managers from "locking in" all their appropriations with front end RFP's and encumbrances.
9. Budget's Should be Organized by Management Hierarchy - For each budget report, organize line items by Supervisor's responsibility area (i.e. by Deputy Supt.) - Show there name at top and in the sub-total for the group, and for each functional line item (which I assume compares to departments run by individuals), show the Dept. manager's name. Now you are showing budgets grouped by management responsibility area, and you can see overall trends of increases, etc. by manager. Better yet, I would create a version of the budget that showed a total budget for each manager, revenue sources, appropriations, a group of routine program expenses, followed by a group of non-routine program expenses and contingencies (contingencies should be clearly split out in a separate line item - thus you might have a line item for routine travel for known items, and then in the non-routine section you would see a non-routine travel contingency in case a "possible" conference in California will require travel. (added 7/24/08)
10.
The above is just a start for revision recommendations for the annual budget format. We recommend using spreadsheets that are uploaded to the website that show this detail - I should be able to find one line on "Maintenance of Plant" and be able to scroll across (or drill down to support worksheets) to see all the spending for that activity in all separate funds to see a grand total.
--- more to come - it will be added in this post ---
