Santa Cruz City Schools Report

Fiscal Review July 16, 2020 Santa Cruz City Schools Michael H. Fine Chief Executive Officer July 16, 2020 Kris Munro, Superintendent Santa Cruz City Schools 133 Mission Street, Ste. 100 Santa Cruz, CA 95060 Dear Superintendent Munro: In December 2019, the district entered into an agreement with FCMAT to review the district’s 2019-20 first interim budget and its Business Services Department. Specifically, the study agreement states that FCMAT will complete the following: 1. Review the district’s 2019-20 first interim general fund budget and multiyear financial projection (MYFP) of the current and two subsequent fiscal years to validate the district’s financial status. The budget review will be a snapshot in time of the district’s current financial status. Make recommendations for expenditure reductions and/or revenue increases to help the district maintain financial solvency. 2. Review operational processes and procedures in the district’s Business Services Department and make recommendations for improved efficiency, if any, in the following areas: • Budget development • Budget monitoring • Position control • Accounts payable • Accounts receivable • Payroll This report contains the study team’s findings and recommendations. FCMAT appreciates the opportunity to serve the Santa Cruz City Schools and extends thanks to all the staff for their assistance during fieldwork. Sincerely, Michael H. Fine Chief Executive Officer Fiscal Crisis and Management Assistance Team Michael H. Fine • Chief Executive Officer 1300 17th Street – City Centre, Bakersfield, CA 93301-4533 • Tel. 661-636-4611 • Fax 661-636-4647 www.fcmat.org Table of contents Table of Contents About FCMAT ...................................................................................................ii Introduction .......................................................................................................1 Executive Summary .......................................................................................2 Findings and Recommendations................................................................3 Multiyear Financial Projection ............................................................................................3 Revenues .................................................................................................................................9 FCMAT Multiyear Projection .............................................................................................16 Risks to the Unrestricted General Fund ........................................................................21 Other Funds .........................................................................................................................23 Revenue Enhancement and Expenditure Reductions ...............................................24 Business Services ..............................................................................................................28 Appendices ....................................................................................................33 FFiissccaall CCrriissiiss aanndd MMaannaaggeemmeenntt AAssssiissttaannccee TTeeaamm Santa Cruz City Schools II About FCMAT FCMAT’s primary mission is to assist California’s local K-14 educational agencies to identify, prevent, and re- solve financial, human resources and data management challenges. FCMAT provides fiscal and data manage- ment assistance, professional development training, product development and other related school business and data services. FCMAT’s fiscal and management assistance services are used not just to help avert fiscal crisis, but to promote sound financial practices, support the training and development of chief business offi- cials and help to create efficient organizational operations. FCMAT’s data management services are used to help local educational agencies (LEAs) meet state reporting responsibilities, improve data quality, and inform instructional program decisions. FCMAT may be requested to provide fiscal crisis or management assistance by a school district, charter school, community college, county office of education, the state Superintendent of Public Instruction, or the Legislature. When a request or assignment is received, FCMAT assembles a study team that works closely with the LEA to define the scope of work, conduct on-site fieldwork and provide a written report with findings and recom- mendations to help resolve issues, overcome challenges and plan for the future. Studies by Fiscal Year 90 80 70 60 50 40 30 20 10 0 96/97 97/98 98/99 99/00 00/01 01/02 02/03 03/04 04/05 05/06 06/07 07/08 08/09 09/10 10/11 11/12 12/13 13/14 14/15 15/16 16/17 17/18 18/19 FCMAT has continued to make adjustments in the types of support provided based on the changing dynam- ics of K-14 LEAs and the implementation of major educational reforms.FCMAT also develops and provides numerous publications, software tools, workshops and professional learning opportunities to help LEAs operate more effectively and fulfill their fiscal oversight and data management responsibilities. The California School Information Services (CSIS) division of FCMAT assists the California Department of Education with the implementation of the California Longitudinal Pupil Achievement Data System (CALPADS). CSIS also hosts and maintains the Ed-Data website (www.ed-data.org) and provides technical expertise to the Ed-Data part- nership: the California Department of Education, EdSource and FCMAT. FCMAT was created by Assembly Bill (AB) 1200 in 1992 to assist LEAs to meet and sustain their financial obligations. AB 107 in 1997 charged FCMAT with responsibility for CSIS and its statewide data management work. AB 1115 in 1999 codified CSIS’ mission. seidutS fo rebmuN About FCMAT Fiscal Crisis and Management Assistance Team Santa Cruz City Schools II About FCMAT AB 1200 is also a statewide plan for county offices of education and school districts to work together locally to improve fiscal procedures and accountability standards. AB 2756 (2004) provides specific responsibili- ties to FCMAT with regard to districts that have received emergency state loans. In January 2006, Senate Bill 430 (charter schools) and AB 1366 (community colleges) became law and ex- panded FCMAT’s services to those types of LEAs. On September 17, 2018 AB 1840 was signed into law. This legislation changed how fiscally insolvent dis- tricts are administered once an emergency appropriation has been made, shifting the former state-centric system to be more consistent with the principles of local control, and providing new responsibilities to FCMAT associated with the process. Since 1992, FCMAT has been engaged to perform more than 1,000 reviews for LEAs, including school districts, county offices of education, charter schools and community colleges. The Kern County Superin- tendent of Schools is the administrative agent for FCMAT. The team is led by Michael H. Fine, Chief Execu- tive Officer, with funding derived through appropriations in the state budget and a modest fee schedule for charges to requesting agencies. Fiscal Crisis and Management Assistance Team Santa Cruz City Schools III Introduction Introduction Background Located in Santa Cruz County, the Santa Cruz City Schools (SCCS) serves approximately 6,400 TK through 12th grade students in the city of Santa Cruz and surrounding areas. SCCS is unique in that it is composed of the Santa Cruz City Elementary and Santa Cruz City High school districts that are governed, administered and reported as one local educational agency. SCCS oversees four elementary schools, two middle schools, three high schools, and a small schools campus, which houses a home school, an independent study program, an alternative option high school, an alternative elementary school, and a Head Start program. For 2019-20, the California Longitudinal Pupil Achievement Data System information identified an enroll- ment of 1,976 and an unduplicated pupil percentage (UPP), which is composed of students who qualify for free or reduced-price meals, are English learners, or are foster youth, of 42.51% for Santa Cruz City Elemen- tary School District and 4,463 and 35.94% respectively for Santa Cruz City High School District. Study and Report Guidelines In December 2019, the Santa Cruz City Schools and the Fiscal Crisis and Management Assistance Team (FCMAT) entered into an agreement for FCMAT to conduct a review of the district’s first interim budget and its Business Services Department. FCMAT visited the district on February 18-20, 2020 to conduct interviews with district and school site staff, col- lect data and review documents. Following fieldwork, FCMAT conducted telephone interviews and continued to review and analyze documents received through April 29, 2020. This report is the result of those activities. FCMAT’s reports focus on systems and processes that may need improvement. Those that may be function- ing well are generally not commented on in FCMAT’s reports. In writing its reports, FCMAT uses the Asso- ciated Press Stylebook, a comprehensive guide to usage and accepted style that emphasizes conciseness and clarity. In addition, this guide emphasizes plain language, discourages the use of jargon and capitalizes relatively few terms. Study Team The study team was composed of the following members: John Von Flue Colleen Patterson, MBA, CMA FCMAT Chief Analyst FCMAT Consultant Leonel Martínez Dominico Johnston, MBA FCMAT Technical Writer FCMAT Consultant Those members of this study team who are otherwise employed by a local educational agency (LEA) were not representing their respective employers but were working solely as independent contractors for FC- MAT. Each team member reviewed the draft report to confirm accuracy and achieve consensus on the final recommendations. Fiscal Crisis and Management Assistance Team Santa Cruz City Schools 1 Executive Summary Executive Summary Multiyear financial projections (MYFPs) provide a financial planning framework based on historical and an- ticipated district data, district goals, and a set of reasonable assumptions. Santa Cruz City Schools requested that FCMAT review its first interim budget and Business Services De- partment. As part of the process, FCMAT developed an independent MYFP based on the district’s first interim report, data and assumptions gathered from the district and other local, state and federal sources at that time, and identified trends. SCCS is unique in that it consists of two districts that are governed, administered and report as one. The elementary district is basic-aid funded, but the high school district is funded based on state funding of the local control funding formula (LCFF). FCMAT’s MYFP expects the district’s pattern of declining enrollment to continue through 2021-22. The decline affects the district’s revenue projections for the secondary’s LCFF funds. The elementary is funded by local property taxes in excess of its LCFF calculation; therefore, de- clining enrollment does not affect funding. However, other uncertainties arise with funding driven by local collections calculated by local property valuations. Historically, the Santa Cruz community has indefinitely supported the district with parcel taxes. In addition, the district has received substantial support from local community donations, which should be closely monitored because they are an unsecured source. FCMAT adjusted revenue estimates in the current year to reflect known and secured revenue expectations at the first interim reporting period. The resulting adjustment reduced the current year revenues by approximate- ly $1.4 million. SCCS’s expense projections were based on the available historical data and current year detailed year-to-date expenditures. Adjustments were made to expense and transfer categories totaling an increase of more than $1.3 million. FCMAT identified significant current year deficit spending, which served as a basis for continued deficit spending. Because of its current year beginning fund balance of more than $16 million, the district can maintain its reserve for economic uncertainty through the current and subsequent year. However, without curtailment of deficit spending, the district will expend the remainder of its reserves in 2021-22 and is pro- jected to end that year with a negative fund balance. As part of the analysis, FCMAT reviewed the district’s practices and funds, looking for opportunities to max- imize use of existing funds, increase revenues and reduce expenditures. FCMAT identified several opportu- nities for the district to consider implementing.. FCMAT’s review of the Business Services Department found opportunities to reinforce and improve practic- es. While no significant discrepancies were found in the district’s business operations, this report contains recommendations to improve, organize and document procedures. Fiscal Crisis and Management Assistance Team Santa Cruz City Schools 2 Findings and Recommendations Multiyear Financial Projection Findings and Recommendations Multiyear Financial Projection Multiyear financial projections (MYFPs) provide the board and district with a fiscal planning framework that allow them to make budget decisions to address current and future issues. Assembly Bill (AB) 1200 and AB 2756 require MYFPs to be included in the budget adoption and interim budget reporting process. In June 2004, AB 2756 (Daucher) was passed and signed into law on an urgency basis. This legislation made substantive changes to the financial accountability and oversight processes used to monitor the fiscal position of school districts and county offices of education. Among other things, AB 2756 strengthened the roles of the superintendent of public instruction, county office of education and FCMAT and their ability to intervene during fiscal crisis. California school districts and county offices use many different methods and software products to prepare MYFPs. The projection for the district’s general fund used in this report was prepared using FCMAT’s Pro- jection-Pro multiyear and cash flow projection software, a web-based forecasting tool that is available at no cost to all California school districts. FCMAT reviewed revenue and expenditure trends during recent years, used industry-standard variables provided by the School Services of California (SSC) Financial Dartboard, and based its projection on the district’s 2019-20 first interim report for the current and two subsequent fiscal years. Any forecast of financial data has inherent limitations because calculations are based on certain assump- tions and criteria, including enrollment trends, cost-of-living fluctuations, funding sustainability, forecasts of costs for utilities, fuel and other consumables, and local, state and national economic conditions. Therefore, the projections should be viewed as a trend based on certain criteria and assumptions rather than a predic- tion of exact numbers. MYFPs can serve as the basis for more informed decisions and provide the ability to forecast the fiscal effects of decisions, but they should be updated at least at each interim financial report- ing period, when known economic forecasts change, and in preparation for negotiations. When developing and implementing its MYFP, a district’s main objectives are to achieve and sustain a bal- anced budget, maximize academic achievement and maintain local governance. The MYFP helps identify specific planning milestones that can help the district make decisions. According to the first interim financial reports submitted for the 2019-20 fiscal year, the district was projected to deficit spend by $2.3 million and projected an unrestricted ending fund balance of $12.2 million. 1. California school districts must continue to plan for shifts in funding allocations and growth. LCFF is fully funded therefore future increases from the state will depend on cost of living adjustments (COLA). The approval of the income tax extension (Proposition 55) by California voters will continue to support state revenues through 2030, but the revenue is expected to be volatile, and there is uncertainty about how much will be generated. 2. Each district faces its own set of financial risk factors based on reserve levels, enrollment trends, employee compensation, degree of revenue volatility and various other local and statewide factors. Districts must plan accordingly to meet ongoing academic and program objectives while maintaining fiscal solvency. 3. Developing an MYFP provides a baseline result that can help a district frame its fiscal conversation for the current and two subsequent fiscal years and focus on priorities such as the following: Fiscal Crisis and Management Assistance Team Santa Cruz City Schools 3 Findings and Recommendations Multiyear Financial Projection • Maintaining adequate reserves to allow for unanticipated circumstances. • Maintaining fiscal flexibility by limiting commitments to future increased expendi- tures based on projections of future revenue growth, and/or establishing contingen- cies that allow for expenditure plans to be changed as needed. • Analyzing enrollment trends and regularly updating MYFPs. • Routinely preparing alternative MYFPs that can show the fiscal impact of different budget assumptions through each year of the fiscal model. • Developing an expenditure reduction plan that can be implemented in a timely manner should it be necessary. The assumptions used to develop FCMAT’s projection include the following: Base Year Year 1 Year 2 Description 2019-20 2020-21 2021-22 Enrollment projection 6,493 6,366 6,193 Average Daily Attendance (ADA) 6,066.46 5,996.73 5,833.32 projection Funded ADA 6,098.68 6,036.37 5,854.50 Statutory cost-of-living adjustment 3.26% 2.29% 2.71% (COLA) California Lottery Unrestricted per ADA $153 $153 $153 California Lottery Restricted per ADA $54 $54 $54 STRS Employer rates 17.10% 18.40% 18.10% PERS Employer rates 19.721% 22.80% 24.90% California CPI 3.09% 2.99% 2.89% Health and Welfare Rate increase 6% 6% Classified step increase 2.02% 2.02% Certificated step-and-column increase 1.68% 1.68% Indirect cost 5.19% 4.47% 4.47% Details and justifications supporting these assumptions and their application will be provided in the sec- tions to follow. Current Year Estimates The first step in this process is to establish the current year revenue and expenditures. Accurately estab- lishing these figures is essential since they will be used to determine the subsequent year’s projections. Likewise, as ending fund balances become the beginning fund balance for the subsequent year, establish- ing the current year ending fund balance is essential. The following table lists current year revenues and expenditures for the first interim as stated by the district and by FCMAT’s estimates. Fiscal Crisis and Management Assistance Team Santa Cruz City Schools 4 Findings and Recommendations Multiyear Financial Projection 2019-20 General Fund Budget FCMAT adjustments Object Code District First Interim Adjustment FCMAT Revenues LCFF 8010-8999 $70,583,877.00 $(17,367.00) $70,566,510.00 Federal 8100-8299 $3,849,075.00 $- $3,849,075.00 State 8300-8599 $5,391,639.00 $112,353.00 $5,503,992.00 Local 8600-8799 $10,738,550.00 $(912,741.00) $9,825,809.00 Interfund Transfers In 8900-8929 $614,000.00 $- $614,000.00 Total $91,177,141.00 $(1,431,755.00) $89,745,386.00 Expenses Certificated Salaries 1000-1999 $38,173,545.00 $126,631.00 $38,300,176.00 Classified Salaries 2000-2999 $13,208,275.00 $84,698.00 $13,292,973.00 Employee Benefits 3000-3999 $23,080,398.00 $554,619.00 $23,635,017.00 Books and Supplies 4000-4999 $6,233,996.00 $(141,775.00) $6,092,221.00 Services and Operating 5000-5999 $12,066,797.00 $784,979.00 $12,851,776.00 Capital Outlay 6000-6999 $964,741.00 $(114,110.00) $850,631.00 Other Outgo 7100-7299 7400-7499 $25,362.00 $(17,331.00) $8,031.00 Interfund Transfers Out 7600-7629 $300,000.00 $54,596.00 $354,596.00 Direct / Indirect 7300-7399 $- $- $- Total $94,053,114.00 $1,332,307.00 $95,385,421.00 Fund Balance Beginning Fund Balance $16,353,469.07 $- $16,353,469.07 Ending Fund Balance $13,477,496.07 $(2,150,062.00) $11,327,434.07 Source: District first interim report, FCMAT Projection-Pro Explanations and justifications for the FCMAT adjustments to the district’s budget are detailed in sections to follow. The FCMAT estimates will then be used as the 2019-20 budget and basis for the MYFP provided later in this report. Enrollment, Average Daily Attendance, Unduplicated Pupil Percent Historical enrollment and attendance patterns help identify potential changes in future enrollment and are therefore, core components of any MYFP. Enrollment projections are essential in identifying changes that may significantly change an LEA’s estimated revenue in subsequent years of a projection. When prepared timely, they also provide key information for determining instructional priorities, grade level configurations, and potential boundary changes. The best practice dictates enrollment projections by grade level should be prepared regularly and with enough detail to monitor and project class sizes in subsequent years. Fiscal Crisis and Management Assistance Team Santa Cruz City Schools 5 Findings and Recommendations Multiyear Financial Projection Most of a school district’s funding is based on the Local Control Funding Formula (LCFF). Student enroll- ment, unduplicated pupil percentage (UPP) and average daily attendance (ADA) by grade level are all important components of LCFF, which is explained in the Revenue Projection section portion of this report. Enrollment and ADA projections have inherent limitations because they are based on certain criteria and assumptions instead of exact calculations. Limitations include issues such as the unpredictable timing of housing trends, unanticipated changes in enrollment, and changing local, state and federal economic con- ditions. The forecasting model should be viewed as a trend based on certain criteria and assumptions at a given point in time rather than an exact prediction. To maintain the most reliable and accurate projections, the district should routinely prepare and update enrollment and attendance data. These updates will allow the district to capture a more realistic picture of the various factors that determine the district’s level of LCFF funding and adjust budgets accordingly. Enrollment data is a product of historical enrollment data certified during the Fall 1 census date for the Cali- fornia Longitudinal Pupil Achievement Data System (CALPADS). Enrollment retention is a key component in maximizing ADA and therefore district funding. Enrollment retention should be a key performance indicator used by the district throughout the year and studied historically. Retention within and between school years should be a regular measurement analyzed by the district. Enrollment history and projections for the district by grade span are presented in the table below. Historical Historical Historical Historical Historical Enrollment Data Base Year Year 2 Year 3 5 4 3 2 1 Grade Span 2014-15 2015-16 2016-17 2017-18 2018-19 2019-20 2020-21 2021-22 TK-3 1,617 1,555 1,468 1,422 1,302 1,292 1,221 1,168 4-6 1,181 1,191 1,143 1,098 1,053 1,045 1028 984 7-8 782 787 782 749 761 780 725 695 9-12 3,384 3,272 3,266 3,352 3,360 3,322 3,392 3,346 Total TK-12 6,964 6,805 6,659 6,621 6,476 6,439 6,366 6,193 YOY Change -159 -146 -38 -145 -37 -73 -173 YOY Change (%) -2.28% -2.15% -0.57% -2.19% -0.57% -1.13% -2.72% Source: FCMAT Projection-Pro enrollment The enrollment and ADA projections were prepared by FCMAT based on reported data for years 2014-15 through 2018-19. The projections indicate the district should anticipate continued enrollment decline in 2020-21. In 2021-2, the district is expected to experience an increase in the rate of decline to 2.72 percent. The increased rate of decline stems from the exiting graduating classes being larger than the expected incoming TK-K. FCMAT’s projections indicate a decline of 73 students in 2020-21 and an additional decline of 173 students in 2021-22. The district is funded by data submitted as of the second attendance reporting period (P-2) ADA. This at- tendance reporting is typically calculated based on student attendance from the first day of school through the last school month ending on or before April 15. For 2019-20, as a result of Senate Bill 117, for districts that comply with Executive Order N-26-20, the second attendance and annual reporting periods were mod- ified to only include full school months from July 1, 2019 through the last month ending on or before Febru- ary 29, 2020, inclusive. The district should regularly monitor its attendance data to forecast whether layoff notices are necessary, en- suring management has adequate time to prepare them. Failure to identify necessary reductions in revenue based on declines in ADA and implement timely staffing changes will be a significant detriment to the district. Fiscal Crisis and Management Assistance Team Santa Cruz City Schools 6 Findings and Recommendations Multiyear Financial Projection California school districts funded under LCFF receive funding based on the greater of the prior or current fiscal year ADA. When ADA declines, the district has one year to make necessary staffing adjustments be- fore its LCFF revenue stream decreases. LCFF funding (specifically, supplemental and concentration grant funding) is also determined based on the LEA’s unduplicated pupil percentage (UPP), which is the percentage of the district’s students who are eligi- ble for free or reduced-priced meals and/or identified as English learners and/or foster youth; eligibility of a student is only counted once even if the student meets multiple criteria. The UPP is determined based on a three-year rolling average of the ratio of unduplicated students enrolled to total enrollment. FCMAT reviewed district enrollment and ADA data for five historical years and found the district’s ADA as compared to enrollment levels remained consistently in the 94.14 to 94.34% range. This suggests that a strong correlation between enrollment and ADA will continue into the forecast years which is reflected in the table below. Enrollment to ADA Historical 5 Historical 4 Historical 3 Historical 2 Historical 1 Base Year Year 2 Year 3 Retention % Grade Span 2014-15 2015-16 2016-17 2017-18 2018-19 2019-20 2020-21 2021-22 Grades TK-3 94.51% 94.37% 94.00% 94.55% 94.31% 94.33% 94.33% 94.33% Grades 4-6 94.99% 95.04% 94.78% 94.78% 95.49% 95.07% 95.07% 95.07% Grades 7-8 95.12% 95.34% 95.15% 95.15% 94.40% 94.92% 94.92% 94.92% Grades 9-12 93.46% 93.82% 94.01% 93.52% 93.76% 93.73% 93.73% 93.73% Grades TK-12 94.15% 94.34% 94.27% 94.14% 94.23% 94.21% 94.18% 94.18% Source: FCMAT Projection-Pro Since 2014-15, the district has experienced declining enrollment and ADA. Unless other factors substanti- ate a shift in this trend, the district should continue to forecast annual declines in enrollment and therefore ADA. Based on current enrollment, ADA is projected to drop 1.15% in 2020-21 and 2.72 % in 2021-22. Historic and Historical 5 Historical 4 Historical 3 Historical 2 Historical 1 Base Year Year 2 Year 3 Projected ADA Grade Span 2014-15 2015-16 2016-17 2017-18 2018-19 2019-20 2020-21 2021-22 Grades TK-3 1,528.28 1,467.51 1,379.89 1,344.49 1,227.86 1,218.77 1,151,.79 1,101.80 Grades 4-6 1,121.86 1,131.90 1,083.34 1,040.67 1,005.56 993.44 977.28 935.45 Grades 7-8 743.87 750.35 744.05 712.66 718.37 740.39 688.19 659.71 Grades 9-12 3,162.66 3,069.89 3,070.35 3,134.90 3,150.27 3,113.86 3,179.47 3,136.36 Grades TK-12 6,556.67 6,419.65 6,277.63 6,232.72 6,102.06 6,066.46 5,996.73 5,833.32 YOY Change -137.02 -142.02 -44.91 -130.66 -35.64 -69.69 -163.41 YOY Change (%) -2.09% -2.21% -0.72% -2.10% -.58% -1.15% -2.72% Source: FCMAT Projection-Pro The chart below compares the funded ADA projected by FCMAT in comparison to the district’s reported ADA projections at budget adoption, in district’s first interim criteria and standards, and in district’s first interim LCFF calculator. Fiscal Crisis and Management Assistance Team Santa Cruz City Schools 7 Findings and Recommendations Multiyear Financial Projection As mentioned before, districts are funded at the better of current year or prior year P-2 ADA. Districts in declining enrollment will be guaranteed funding from prior year ADA. The following chart considers that guarantee of ADA. Funded ADA comparison Source Fiscal Year 2019-20 2020-21 2021-22 SCCS Budget Adoption (Form 01CS, Item 1A) 6114.9 5991.03 5851.95 SCCS MYP 1st Interim C&S (Form 01CS, Item 1A) 6095.28 6084.06 5965.44 SCCS LCFF Calculator * 6101.96 6090.74 5972.12 FCMAT calculation 6098.68 6036.37 5854.50 *2019-20 LCFF Calculator elementary first interim v20.2c-LCFF 12.3.19-JL and 2019-20 secondary first interim LCFF Calculator 12.03.19 v20.2c-JL) Since district revenues and expenditure decisions are driven by enrollment, measures should be taken to ensure enrollment is adequately projected. If enrollment projections vary from the historical norm, the dis- trict should be able to substantiate the reductions or increases. Fiscal Crisis and Management Assistance Team Santa Cruz City Schools 8 Findings and Recommendations Revenues Revenues FCMAT developed a MYFP and analyzed the district’s MYFP to ensure it was in line with the state’s 2019-20 district funding allocations and School Services of California’s planning factors. Revenue Assumptions (Object 8XXX): Projected revenue was based on validation of funding from the January 2020 Governor’s Projected Budget, California Department of Education (CDE), SSC’s Financial Projections Dartboard (attached as Appendix A to this report), grant letters, and analysis of district budgeted amounts for sources that could not be inde- pendently verified. Local Control Funding Formula The implementation of the LCFF began with the 2013-14 fiscal year. The LCFF replaced the former revenue limit calculation and charter school block grant. The LCFF provides the following: • A base per-pupil grant that varies by grade span. • Supplemental funding that provides an additional 20% of the per-pupil base grant multi- plied by the unduplicated pupil percentage (UPP) of targeted disadvantaged pupils. Tar- geted pupils are those classified as English learners, those who qualify for free or re- duced-price meals and those who are foster youth. • Concentration funding that provides an additional 50% of the base grant multiplied by the percentage of targeted disadvantaged pupils in excess of 55% of total enrollment. LCFF eliminated many former state categorical programs for all LEAs, including school districts, charter schools, and county offices of education; these dollars were redirected to support LCFF. Full implemen- tation of the LCFF for school districts and charter schools was achieved in 2018-19, two years earlier than anticipated, with all LEAs receiving their target allocations of LCFF funding. Funding growth will not be at the same rate of recent years as a result of LCFF already reaching its target. The district’s future LCFF funding growth from the state is contingent on changes in state applied cost-of- living adjustments (COLA), ADA growth, and unduplicated student counts. The elementary district’s operation falls under the classification of basic aid. A district that is basic aid keeps the money generated from local property tax in excess of its state-mandated LCFF total funding. This additional funding component allows funding changes for grades K-5 to be realized from changes in taxes collected based on property valuations within the district with little impact from declining ADA. While property appreciation in the region has historically been strong, periods of significant revisions against the trend have been seen (Average Appreciation Index for Single Family Homes in Santa Cruz County, Santa Cruz Association of Realtors https://www.mysantacruzrealestate.com/Statistics.php). This data identifies a range of annual appreciation in home sales from -20.7% to more than 50% resulting in an average of approximately 7.6% over the last 40 years. As the assessed value of property within the district has a direct impact on the district’s total LCFF funding, property valuations and trends within the district should be an area of regular observation and analysis. Fiscal Crisis and Management Assistance Team Santa Cruz City Schools 9 Findings and Recommendations Revenues The elementary district’s projection of LCFF funding in the 2020-21 and 2021-22 fiscal years indicates that the district will continue as basic-aid funded. Based on projected LCFF funding as compared to local property tax finds, FCMAT estimates that the local property tax revenues will exceed the LCFF funding by approximately 50% through that period. Therefore, the elementary district’s funding depends on growth through assessed valuations inside the district’s boundary. While historically such a trend has been sup- ported, its future funding depends on local economic conditions. Given the district’s reliance on assessed property valuation, a regular analysis should be performed with assistance from the county assessor to ensure district projections are aligned with anticipated tax collections. The secondary (high school) operation is LCFF funded based on ADA. When calculating ADA projections, the elementary experienced a greater loss in ADA. This loss was due to both cohort survival estimates (grade level ADA maintenance from year to year) and, for 2018-19, the transition of sixth grade from the ele- mentary operation to the secondary operation. The 2019-20 P-1 reports that 328.88 ADA for sixth grade are now reported to the secondary LCFF calculation. The UPP calculated within the LCFF is the district’s average of the current year UPP, plus the prior two years. The assumed UPP used in the district’s first interim LCFF models is 41.43% of the elementary school population and 38.06% for the secondary school population. The UPP calculations were made in consid- eration of the transfer of sixth grade students to the secondary school. With that consideration, FCMAT deems the assumptions reasonable measures and are in line with historical trends. The use of fall 1 CAL- PADS unduplicated student data is critical in the development and revisions of district UPP data within LCFF calculations. Guidance from the county office and the California Department of Finance are both valuable sources of information to enable the district to make ad hoc changes in the face of sudden economic swings. Districts are encouraged to use the most current FCMAT LCFF Calculator to estimate LCFF funding. Federal Revenue (8100-8299) Funding from federal grants and entitlements is restricted in accordance with their provisions. The district operates multiple restricted federally funded programs including, but not limited to Title I, Title II, Title III, Title IV, Migrant Education, Medi-Cal administrative activities, and various special education programs. FCMAT confirmed the district’s federal award amounts were correct per CDE funding allo- cation schedules for 2019-20. The district has used a conservative flat funding approach with federal funding in the two subsequent fiscal years. Changes in federal funding are contingent on multiple economic, political and demographic factors. Routine evaluation from these sources of fiscal guidance should be sought and factored into district budget updates. Because federal funding is dependent on a reimbursement process, it will naturally place districts in a cash-short position since they have to use other funds to support the federally funded operations until the reimbursement is received. The greater the reli- ance on federal funding for operational activities, the greater the need to maintain a healthy balance of cash per month. Other State Revenue (8300-8599) State revenues were evaluated using information provided by the district and verified by CDE reported figures. The district has taken a flat funding approach in its out year projections. Constant evaluation of the out-year assumed funding should be given based on the district’s declining enrollment trend and the invariability of predicting the state’s COLA rate. FCMAT projected lottery revenues for 2019-20 using actual prior year annual ADA, adjusted for the statewide average excused absence factor, and multiplied by $153 for unrestricted and $54 for restricted lottery revenues, per the SSC Dartboard. Based on the prior year’s annual ADA funded lottery allocations, Proposition 20 and non-Proposition-generated Lottery funds are Fiscal Crisis and Management Assistance Team Santa Cruz City Schools 10 Findings and Recommendations Revenues expected to come in approximately $112,000 more than what the district projected at first interim. A minor increase of $249 was also added to the mandated block grant funding. AB 602 established the state’s special education funding structure in 1997. Special education funding is based on the ADA of all district students and does not consider those identified in the district and the cost to serve them. SCCS belongs to the North Santa Cruz County SELPA (special education local plan area). The SELPA’s role is to receive fund- ing from the state and allocate it through a locally determined distribution model. This model ideally allows the local areas to determine how the funds can be distributed to best benefit the SELPA member districts. The first interim 2019-20 revenue allocation to SCCS was approximately $4.7 million or 31.6% of the special education revenue. In addition, through the SELPA allocation Santa Cruz City High is estimated to receive $552,967.75 for hard of hearing and vocational education services provided students of the member dis- tricts. Other Local Revenue (8600-8799) The district received local revenues from leases and rentals, interest earnings, donations, parcel taxes and other miscellaneous sources. Funding from these various sources constitutes roughly 10% of the general fund budget. As a result of the uncertain nature of these revenues, it is critical that a high degree of scrutiny exists when budgeting such figures. FCMAT adjusted budgeted donations based on a four-year historical average, which resulted in a significant decrease in the district’s budget for local revenue. These budget items should also be monitored and updated throughout the year based on amounts received to date. Future year projections should be held to an even higher degree of scrutiny. The unsecured nature of these revenues and their size in the district’s budget can lead to a distorted view of fiscal stability. Modeling local revenue projections using historical and forward-looking models can assist in avoiding over- or understat- ed amounts. Depending on the type of revenue anticipated, formal agreement letters or other contractual documents should be sought as the basis of current and future year projections. In other more transactional activities, such as rental income activity, conservative historical evaluations can substantiate future projec- tions. Parcel Taxes SCCS revenue is supplemented by parcel taxes approved by the community. In 2012, the community ap- proved Measures I and J, to provide $123 per parcel revenue to the district through June 2021, and Mea- sures O and P were approved in 2015 to add $177 per parcel through June 2024. In March 2020, Measures T and U were approved. These measures will replace the prior measures effective July 1, 2020. It is expect- ed that Measure T will generate $3.7 million and Measure U will generate $3.2 million in annual revenue to SCCS. Expenditures The district’s expense assumptions and projections were reviewed and assessed based on prior year, expenses to date and information provided by the district for compensation settlements, the curriculum master plan, and special education expenses. The district uses the Santa Cruz County Office of education financial system, which changed from one platform in 2018-19 to another in 2019-20. District office staff could not replicate actual expenditures that tie to the SACS data reported at first interim reports from either the 2018-19, or the 2019-20 financial system. In addition, the 2018-19 unaudited actual expense detail relat- ed to restricted funds did not tie to the State Categorical Form (CAT), the carryover reported, or reportedly, the Consolidated Application and Reporting System. This lack of readily available accurate historical data from both the financial system used in 2018-19 and the financial system used in 2019-20, could hinder man- Fiscal Crisis and Management Assistance Team Santa Cruz City Schools 11 Findings and Recommendations Revenues agement’s ability to analyze and project expenses and require additional staff time to complete its analysis throughout the year. FCMAT identified approximately $406,550 in potential variances that were under- budgeted in the unrestricted general fund as of the first interim report. Special education expenses were much more affected by the lack of data, and the identified potential variances summed to approximately $925,758 underbudgeted at first interim. District documents indicated that the 2019-20 first interim includes $758,476 in expenses related to restrict- ed programs which need to be eliminated or moved to the unrestricted general fund in 2020-21. Eliminat- ed programs include: Low Performing Student Block Grant, State Career Technical Education Block Grant (CTEIG), Strong Workforce Program, and Medi Cal Program. Assumptions include savings from a reduction of three instructional positions in 2020-21 followed by another reduction of two instructional positions in 2021-22. The actions taken for certificated salaries related to the Low Performing Student Block Grant in the MYP have not been identified by the district. No other adjustments for salaries or position decreases/ increases other than those indicated are included in the district’s multiyear fiscal plan (MYFP). Salaries The district MYFP assumptions provided to FCMAT include a 1.5% annual cost related to certificated step and column, and 2% per year related to Classified Employees. The district’s new 2019-20 financial system is able to calculate the fiscal impact of annual step and column increases by bargaining group. For the FCMAT MYFP, the financial system calculated annual cost for certificated employee unit members of 1.68%, classified employee unit members 2.02%, certificated management .95%, classified management .83% and confidential employees 3.97% were used. Certificated Salary Expenses (1000-1999) FCMAT’s review of unrestricted general fund expenditures through October 2019 and projected expendi- tures through June 2020, based on the 2018-19 first interim expenditures as a percentage of the associated unaudited actual information, indicates that annual projected expenses are underbudgeted by approxi- mately $42,000. The analysis of special education salaries indicates that annual projected expenses are underbudgeted by approximately $110,000. These are the main contributors to an adjustment of approxi- mately $126,000 adjustment to certificated salaries in the current year. The Board approved a retroactive increase in the certificated bargaining unit salaries on June 19, 2019. All of this increase should have been accrued in the 2018-19 closing and reported as a liability in the 2018-19 unaudited actuals. It was paid in August 2019 and reported as a one-time 2019-20 payroll expense. The analysis does not include the impact of the 2% salary increase for certificated unit members adopted by the board October 16, 2019 and paid in November. The district’s MYFP for 2020-21 includes the positive fiscal impact of the reduction of $150,695 in restrict- ed certificated salaries (primarily CTEIG )and the reduction of three unrestricted positions due to declining enrollment at approximately $221,000. These combine to estimate a reduction in certificated positions for 2020-21 for a savings of approximately $371,695. In 2021-22, the MYFP adds savings related to the reduc- tion of two certificated teaching positions totaling $140,000. Fiscal Crisis and Management Assistance Team Santa Cruz City Schools 12 Findings and Recommendations Revenues Classified Salary Expenses (2000-2999) FCMAT’s review of unrestricted general fund expenditures through October 31, 2019 and projected expen- ditures through June 2020. Based on the 2018-19 first interim expenditures as a percentage of associated unaudited actual information, a similar expenditure pattern in 2019-20 would estimate that annual projected expenses are underbudgeted by approximately $30,000. The analysis of special education salaries indicates that annual projected expenses are underbudgeted by approximately $55,000. These combine to approximately $85,000 adjustment to classified salaries. The district’s MYFP for 2020-21 includes the reduction of $14,495 in restricted certificated salaries related to one-time Medi Cal income. Employee Benefits (3000-3999) The benefit accounts are maintained in the district’s position control document and HR information system. FCMAT’s review of the actual expenditures for unrestricted general fund benefits paid through October 2019 and projected expenditures through June 2020, indicates that annual projected Other Post Employ- ment Benefits (OPEB) expenses are underbudgeted by approximately $500,000. Interviews indicate that the budget will be increased to match the levy, though no transfer of excess funding to fund 20 is budget- ed. The shortfall in the current year budget for employee benefits is approximately $550,000. An analysis of the total increase in Health and Welfare expenses for the last two years indicate that the annual rate of increase has been 5.8% for certificated and 6.4% for classified. FCMAT used 6% in the MYFP as opposed to the 4% increase used by the district. Books and Supplies (4000-4999) The district identified an error of $241,000 related to supplies to support the LCAP, which will be decreased in 2020-21 at budget adoption. In addition, FCMAT’s review of actual expenditures through October 2019 and projected expenditures through June 2020 indicates that the $1 million addition to the Curriculum Master Plan for unrestricted books and supplies is excessive, based on current year spending and histori- cal averages. None of the individuals interviewed by FCMAT were confident that the districtwide textbook adoption would occur as budgeted. Based on assumptions and spending patterns, should the adoption not occur, the amount budgeted would be excessive. Based on the likelihood that the adoption would not oc- cur, FCMAT estimates that the unrestricted general fund may be overbudgeted by $200,000 at first interim. The special education program instructional supply expenditures are much higher than prior year expenses causing these accounts to be underbudgeted by approximately $60,000. The net overage in the budget for books and supplies (not including the curriculum master plan) is approximately $140,000. Services and Other Operating Expenses (5000-5999) FCMAT’s review of actual expenditures and encumbrances through October 2019 and projected expendi- tures through June 2020 indicates that unrestricted general fund expenditures are underbudgeted by ap- proximately $450,000 primarily related to consultants and the technology infrastructure expenses. This is offset by overbudgeted amounts of $200,000 in maintenance, rental contracts and several miscellaneous items. The net impact is an overbudget of approximately $160,000 in unrestricted operating expenditures. The analysis of special education expenses indicates an underbudgeting between $80,000 and $630,000 related to nonpublic school (NPS) and private, nonsectarian establishments or individuals that provide services for pupils with exceptional needs through nonpublic agency (NPA) contracts. A comparison of the 2018-19 unaudited actual expenses to the 2019-20 budget forecasted a decrease in this expense, even though there was an increase of 11% in these services from 2017-18 to 2018-19. Based on interviews and Fiscal Crisis and Management Assistance Team Santa Cruz City Schools 13 Findings and Recommendations Revenues schedules reviewed, the district focus is on ensuring that the encumbrances caused by purchase orders are sufficient to allow payment to the vendor, not tracking and monitoring expenses. The district incurred a large increase in these contracted services in the prior year and the FCMAT adjustments are justified based on first interim projections. Based on the information reviewed, FCMAT found the services and other operating expenditures to be underbudgeted by approximately $785,000. Direct Support/Indirect Cost (7300-7399) Following the best practice, the full allowable indirect cost rate should be budgeted and charged to each program and fund, even those that require a contribution from the unrestricted general fund. The charging of indirect with fidelity, allows the district to understand the true cost of each program, to draw on restricted resources and to distribute unallocated costs to all programs. Special education in the current year appears to be underbudgeted by approximately $94,000. In addition, the district uses a 1% indirect cost rate in the MYFP but historically they have been approved by the California Department of Education (CDE) to charge rates in the range of 4.47%-6.59%. Full indirect as approved by the CDE and allowed by the program should be charged with consistency. Contributions to Restricted Funds (8980-8999) The 2019-20 first interim report includes contributions from the unrestricted general fund to support sev- eral restricted programs including federal and state special education programs, Mental Health Services, Workability, and the College Readiness Block Grant. In 2018-19, the general fund provided $560,000 to the District Donation and Local Restricted Program. Ensuring that all qualifying expenditures are appropriately coded to the applicable restricted programs helps provide maximum flexibility and availability of unrestrict- ed funding, which can typically be used for any educational purpose. However, all programs requiring a contribution from the unrestricted general fund should be reviewed to ensure they are self-sustaining or, at minimum, the contribution is planned. The only exceptions should be the restricted maintenance account required contribution, the special education program, which typically receives insufficient state and federal funding, and any restricted programs that the district has made a conscious decision to support with unre- stricted general funds. In the MYFP some restricted programs begin to build a fund balance while others need program modifica- tions or district support. Because of increasing costs year-over-year, the district may need to reduce expen- ditures in several of its other restricted resources in 2020-21 and/or 2021-22 to remain within the projected revenue estimates and prevent encroachment on unrestricted funds. Some areas that be affected include other local programs, Title I, Every Student Succeeds Act (ESSA) migrant education and summer program, Title II, Title III-immigrant student, Title IV, and Title IX. Areas where expenditure reduction are a must to avoid encroachment include lottery instructional materials, the After School Education and Safety Program (ASES), IDEA Federal Preschool, Carl Perkins, and Medi-Cal billing. According to FCMAT’s projection, while no contribution is budgeted for 2019-20, a decrease of $1.3 mil- lion in expenses is required to balance the other restricted local program (9010) in 2020-21. This resource required an unrestricted general fund contribution of $520,000 in 2018-19. Routine Restricted Maintenance Account (RRMA)-(Resource 8150) Districts participating in the school facility program are required to contribute 3% of the total general fund expenditures and other financing uses to the routine restricted maintenance account (RRMA). The district projected a contribution of $2,623,612 from the general fund to the RRMA as of the first interim report, Fiscal Crisis and Management Assistance Team Santa Cruz City Schools 14 Findings and Recommendations Revenues meeting the requirement. The district is expected to receive redevelopment agency funds (RDA)sufficient to cover the RRMA but the district does not use the maximum flexibility associated with the funds outside the LCFF calculation. Expenses that are paid from the RDA funds generally qualify toward and can be used to satisfy the 3% RRMA contribution. (See Revenue Enhancements and Expenditure Reductions section) Fiscal Crisis and Management Assistance Team Santa Cruz City Schools 15 Findings and Recommendations FCMAT Multiyear Projection FCMAT Multiyear Projection The following table summarizes the results of FCMAT’s MYFP for the general fund resources for the current and subsequent two fiscal years. Combined MYP Base Year Year 2 Year 3 Description Object Code 2019-20 2020-21 2021-22 Revenues LCFF Sources 8010-8099 $70,566,510.00 $70,583,877.00 $70,583,877.00 Federal Revenue 8100-8299 $3,849,075.00 $3,832,735.00 $3,832,735.00 Other State Revenues 8300-8599 $5,503,992.00 $5,011,130.84 $5,055,944.78 Other Local Revenues 8600-8799 $9,825,809.00 $9,803,037.93 $9,809,002.34 Transfers In 8900-8929 $614,000.00 $449,000.00 $284,000.00 Total, Revenue $90,359,386.00 $89,679,780.77 $89,565,559.12 Expenditures Certificated Salaries 1000-1999 $38,300,176.00 $38,213,020.63 $38,712,647.38 Classified Salaries 2000-2999 $13,292,973.00 $13,536,478.83 $13,809,915.71 Employee Benefits 3000-3999 $23,635,017.00 $24,444,412.62 $25,364,363.19 Books and Supplies 4000-4999 $6,092,221.00 $3,930,962.79 $3,879,530.31 Services and Other Operating Expenditures 5000-5999 $12,851,776.00 $12,598,011.47 $13,046,276.27 Capital Outlay/Depreciation 6000-6999 $850,631.00 $809,745.00 $809,745.00 7100-7299, 7400- Other Outgo (excluding Transfers of Indirect Costs) $8,031.00 $8,031.00 $8,031.00 7499 Other Outgo - Transfers of Indirect Costs 7300-7399 $- $- $- Transfers Out 7600-7629 $354,596.00 $361,688.00 $368,922.00 Other Adjustments - Expenditures $- $- $- Total, Expenditures $95,385,421.00 $93,902,350.34 $95,999,430.86 Net Increase (Decrease) in Fund Balance/Net Position $(5,026,035.00) $(4,222,569.57) $(6,433,871.74) Fund Balance, Reserves/Net Position Beginning Fund Balance/Net Position As of July 1 - Unaudited 9791 $16,353,469.07 $11,327,434.07 $7,104,864.50 Audit Adjustments 9793 $- $- $- As of July 1- Audited $16,353,469.07 $11,327,434.07 $7,104,864.50 Other Restatements 9795 $- $- $- Adjusted Beginning Balance $16,353,469.07 $11,327,434.07 $7,104,864.50 Ending Balance/Net Position, June 30 $11,327,434.07 $7,104,864.50 $670,992.76 Components of Ending Fund Balance (FDs 01-60 only) $- Nonspendable 9710-9719 $102,000.00 $102,000.00 $102,000.00 Restricted 9740 $385,036.69 $468,836.77 $900,745.32 Committed $- Stabilization Arrangements 9750 $- $- $- Other Commitments 9760 $- $- $- Assigned $- Other Assignments 9780 $- $- $- Negative Restricted Ending Balances Unassigned/Unappropriated $- Reserve for Economic Uncertainties 9789 $2,844,343.00 $2,817,070.00 $2,879,983.00 Unassigned/Unappropriated Amount 9790 $7,994,102.47 $3,716,957.73 $(3,211,735.56) Source: FCMAT Projection-Pro Fiscal Crisis and Management Assistance Team Santa Cruz City Schools 16 Findings and Recommendations FCMAT Multiyear Projection The projection identifies the district with an imbalanced budget, resulting in significant deficit spending. The district’s 2019-20 fiscal year begins with a general fund balance of more than $16.3 million and is expected to decrease its position by approximately $5.0 million to $11.3 million. The deficit spending con- tinues into fiscal year 2020-21 with a deficit of $4.2 million and 2021-22 with a deficit of $6.4 million. As a result, deficit spending decimates the district’s general fund balance in the projection period. A review of the district’s unrestricted general fund MYFP found that unrestricted funds carry the burden of the deficit spending. The projection identifies approximately $19 million per year in contributions from unre- stricted funds to restricted programs, creating a deficit that reduces the district’s unrestricted fund balance each year. Because of its existing reserves, the district can maintain a 3% required reserve for economic uncertainties and a positive unrestricted general fund balance through years 2019-20 and 2020-21. Howev- er, the projections show that the district is on course to deficit spend unrestricted by $6.8 million in 2021-22 and end that year with a negative unrestricted general fund balance. Unrestricted MYP Description Object Code Base Year Year 2 Year 3 2019-20 2020-21 2021-22 Revenues LCFF Sources 8010-8099 $70,566,510.00 $70,583,877.00 $70,583,877.00 Federal Revenue 8100-8299 $- $- $- Other State Revenues 8300-8599 $1,810,151.00 $1,827,317.39 $1,848,097.41 Other Local Revenues 8600-8799 $7,241,100.00 $7,246,328.93 $7,252,293.34 Transfers In 8900-8929 $614,000.00 $449,000.00 $284,000.00 Contributions 8980-8999 $(19,077,092.00) $(18,748,268.56) $(19,796,784.57) Total, Revenue $61,154,669.00 $61,358,254.76 $60,171,483.18 Expenditures Certificated Salaries 1000-1999 $30,611,686.00 $30,681,309.54 $31,054,403.54 Classified Salaries 2000-2999 $9,129,320.00 $9,313,732.27 $9,501,869.66 Employee Benefits 3000-3999 $16,761,757.00 $17,275,076.19 $17,945,464.26 Books and Supplies 4000-4999 $2,533,469.00 $2,436,575.53 $2,506,992.56 Services and Other Operating Expenditures 5000-5999 $6,241,232.00 $6,477,705.31 $6,579,958.03 Capital Outlay/Depreciation 6000-6999 $142,625.00 $101,739.00 $101,739.00 Other Outgo (excluding Transfers of Indirect Costs) 7100-7299, 7400-7499 $8,031.00 $8,031.00 $8,031.00 Other Outgo - Transfers of Indirect Costs 7300-7399 $(1,048,856.00) $(993,184.34) $(1,030,116.58) Other Adjustments - Expenditures $- $- $- Transfers Out 7600-7629 $354,596.00 $361,688.00 $368,922.00 Total, Expenditures $64,733,860.00 $65,662,672.50 $67,037,263.47 Net Increase (Decrease) in Fund Balance/Net Position $(3,579,191.00) $(4,304,417.74) $(6,865,780.29) Fund Balance, Reserves/Net Position Beginning Fund Balance/Net Position As of July 1 - Unaudited 9791 $14,519,636.47 $10,940,445.47 $6,636,027.73 Audit Adjustments 9793 $- $- $- As of July 1- Audited $14,519,636.47 $10,940,445.47 $6,636,027.73 Other Restatements 9795 $- $- $- Adjusted Beginning Balance $14,519,636.47 $10,940,445.47 $6,636,027.73 Ending Balance/Net Position, June 30 $10,940,445.47 $6,636,027.73 $(229,752.56) Fiscal Crisis and Management Assistance Team Santa Cruz City Schools 17 Findings and Recommendations FCMAT Multiyear Projection Components of Ending Fund Balance (FDs 01-60 only) $- Nonspendable 9710-9719 $102,000.00 $102,000.00 $102,000.00 Restricted 9740 $- $- $- Committed $- Stabilization Arrangements 9750 $- $- $- Other Commitments 9760 $- $- $- Assigned $- Other Assignments 9780 $- $- $- Negative Restricted Ending Balance Reserve for Economic Uncertainties 9789 $2,844,343.00 $2,817,070.00 $2,879,983.00 Unassigned/Unappropriated Amount 9790 $7,994,102.47 $3,716,957.73 $(3,211,735.56) Source: FCMAT Projection-Pro As shown in the table above, if revenue and expenditure assumptions hold, and no adjustments are made, the district will end 2021-22 with a negative unrestricted fund balance of $229,752.56. To avoid this nega- tive balance and maintain minimum reserves for economic uncertainty of 3%, the district needs a correction of more than $3.2 million in its budget. The key to maintaining fiscal solvency is retaining sufficient reserves to allow the district to take correc- tive action if changes occur in revenue and/or expenses. Changes could be within or outside the realm of district control. Factors that may decrease revenue include declining enrollment or changes in state fund- ing, local property tax revenues or significant to SCCS, other locally generated revenues. Districts typically balance their budgets through their ability to control and plan expenditures. However, external pressures such as STRS and PERS employer contributions along with unanticipated expenses, such as those related to special education, can derail plans. Therefore, detailed projections, regular adjustments, and reserves adequate to allow corrective action are necessary to ensure a district’s fiscal solvency. The MYFP helps the district determine whether it can maintain fiscal solvency and its required 3% reserve for economic uncertainty for the current plus two subsequent years. If the MYFP determines that the district cannot maintain fiscal solvency and the required reserve, it can also help identify corrective adjustments and their effect on reserve. Recommendations The district should: 1. Continue to monitor and project enrollment and ADA at each financial reporting period to ensure the most recent data is included in its budget assumptions. 2. Continue to use the most current LCFF calculator provided by FCMAT to model various funding scenarios. Model how different changes in factors such as ADA, UPP, COLA, and anticipated local tax revenues could affect the district. 3. Continue to monitor and update the budget throughout the year based on the amounts the district is projected to receive. Check apportionment and entitlement funding exhibits on the CDE’s website regularly for this information. Fiscal Crisis and Management Assistance Team Santa Cruz City Schools 18 Findings and Recommendations FCMAT Multiyear Projection 4. Ensure that all grants, entitlements and carryovers (unearned revenues) are properly updated by the time of the first interim report and that they agree with CDE funding exhibits. 5. Establish a review process and criteria to evaluate the validity of all local revenues budgeted. Budgeted local revenues should be conservative amounts . Anticipated donations should be substantiated through formal agreement. Out year projections should be evaluated in light of potential unforeseen factors. 6. Continue to regularly evaluate other funds and their potential to cause fiscal strain on the general fund’s resources in the current and subsequent fiscal years. 7. Review the detailed information regarding the cost of step and column, to more closely track and estimate the multiyear impact of increased salary costs. The percentage increase in costs used in the MYFP should be divided by additional object codes, including those for certificated instructors, school site office support staff, confidential staff and administrators. 8. Continue to ensure the Human Resources and Business Services departments have a common understanding of the fiscal impact of budgeting the termination of restricted one- time positions, or moving them to the unrestricted general fund, and budgeted reductions in positions related to declining enrollment. 9. Refrain from using one-time revenues to establish new positions or provide ongoing increases in salaries or benefits. 10. Continue to use restricted resources as much as possible before charging expenses to the unrestricted general fund. 11. Ensure settlements, approved by the board of education in the prior fiscal year are accrued while closing the books and reported as a liability in the unaudited actuals. 12. Conduct a detailed analysis of health and welfare benefits at all reporting periods to determine if the budget and multiyear projection assumptions should be revised. 13. Periodically review actual levies of fringe benefits to ensure that the rates listed in the assumptions are those being levied. 14. Review budgets for county office services, NPS and other contract services related to special education programs frequently and, at a minimum, before each interim reporting period. 15. Continue to adopt a budget and MYFPs that eliminate deficit spending and insure fiscal solvency. 16. Review contributions to restricted programs and increase openness by disclosing at each budget reporting period all programs that require a contribution from the unrestricted general fund. This will help ensure all stakeholders are aware of the funding allocated to these programs, particularly during budget reduction discussions. 17. Identify reliable sources to estimate reasonable assumptions for the adoption of a districtwide textbook plan. 18. Include an estimated annual budget for special education programs at budget adoption and continue to adjust the budgets throughout the fiscal year. Fiscal Crisis and Management Assistance Team Santa Cruz City Schools 19 Findings and Recommendations FCMAT Multiyear Projection 19. Continue to charge each restricted resource the full allowable indirect cost rate. 20. Consider using RDA funds to support RRMA expenditures reducing contributions in the budget year and subsequent years. 21. Continue to use the MYFP to identify programs that may require a contribution from the unrestricted general fund in subsequent years, and take any necessary action to ensure programs are self-sustaining. Fiscal Crisis and Management Assistance Team Santa Cruz City Schools 20 Findings and Recommendations Risks to the Unrestricted General Fund Risks to the Unrestricted General Fund Special Education Interviews and analysis indicated that the 2018-19 budget to actual income and expense analysis was not performed before the special education program was budgeted in 2019-20. The 2017-18 and 2018-19 spe- cial education maintenance of effort reports indicate that NPS/NPA services increased 11% over that one year period. In the absence of other data, the expense budgeted for 2019-20 should have included a similar 11% increase in services; however, the district has forecast current year cost of services to increase be- tween 18.8% and 27.5%. This rapid rate of increase affirms the need to perform detailed analyses through- out the year to help manage special education expenses and increase forecasting accuracy. Technology Plan Funding At the October 2019 meeting, the SCCS board ratified the expenditure of $155,450 per year for five years ($777,250) to procure 2,500 Chromebooks. The funding source was identified as lease revenue. Unless the district has signed long-term rental contracts to secure the funding, the revenue to support the expenditure may not materialize and it is questionable whether the district should recognize the lease revenue. Revenue recognition is a generally accepted accounting principle (GAAP) that identifies the specific condi- tions in which revenue is recognized and determines how to account for it. Before revenue is recognized, the following criteria must be met: • Persuasive evidence of an arrangement must exist. • Delivery must have occurred or services rendered. • The seller’s price to the buyer must be fixed or determinable. • Collectability should be reasonably assured. Inventory Education Code Section 35168 requires the governing board to establish and maintain an inventory of all equipment items with a current market value of more than $500. When federal funds are used for a pur- chase, the district is required to include additional information in its inventory records, including the funding source, titleholder, and percent of federal participation (34 CFR 80.32 and 5 CCR 3946). In addition, at least once every two years, a physical inventory of equipment must be conducted and the results reconciled with the property records (34 CFR 80.32). Interviews indicate that the district is using a “free” software inventory system (in exchange for buying as- set tags) that does not have the capability of scanning asset tags to produce a physical inventory of equip- ment at school sites. Scanning occurs only when computers originally arrive at the warehouse. Interviews also indicate that a biannual inventory does not occur. Cashflow The district continues to lower its reserves in its MYFP while relying on a larger percent of program costs supported by property tax revenue increases. This may reduce the ability to internally borrow operating cash from district funds. The district should regularly and routinely evaluate its cash position and project its cash flow through, at a minimum, the remainder of the current and subsequent fiscal year. Based on the outcome of its cash flow projection, the district may need to consider options for borrowing of funds from outside sources and budget for the cost of that borrowing. Fiscal Crisis and Management Assistance Team Santa Cruz City Schools 21 Findings and Recommendations Risks to the Unrestricted General Fund Audit Findings The 2018-19 annual audit identified findings that, if left uncorrected or to continue, could undermine con- fidence in the district fiscal reporting and status. One finding found an overstatement of free and re- duced-price meal eligible students which also caused the overreporting of the district’s unduplicated pupil percentage resulting in an overbudgeting of LCFF revenues. Another finding regarding the proper reporting of expenditures in the appropriate fiscal year, caused an overstatement of fund balance for the year. Recommendations The district should: 1. Review actual expenses for special education regularly and adjust no less that at all reporting periods and particularly before budget adoption. 2. Avoid recognizing revenue that is not secured or at a minimum satisfies GAAP standards. 3. Implement an inventory system with biannual reviews to track and protect district assets of $500 value, not just computers. Consider the procurement of an inventory tracking system, that uses UPC trackable codes, that can be scanned on campuses 4. Conduct regular and routine cash position evaluations and projections to ensure cash flow is known and plans are developed and implemented to meet cash needs through the current and subsequent fiscal year. 5. Review and correct student data collection and reporting procedures to ensure proper reporting of students in CALPADs. 6. Review and establish proper fiscal year closing procedures to ensure cash, accounts receivable and accounts payable reconciliations are completed and recorded in the proper period. Fiscal Crisis and Management Assistance Team Santa Cruz City Schools 22 Findings and Recommendations Other Funds Other Funds A review of the district’s 2018-19 unaudited actuals and the 2019-20 first interim for other funds found that, other than the cafeteria fund, none are expected to require contributions from the unrestricted general fund in the current or two subsequent fiscal years of the projection. Two transfers, one from fund 21 and one to fund 13 were included in the first interim budget. Cafeteria Fund (Fund 13) is a restricted fund used to account for the food service program. The cafeteria fund is not self-sustaining and has planned deficit spending in 2019-20. It is common in districts with low participation rates to deficit spend in their food service programs. Low eligibility for free and reduced- priced-meals and open campuses contribute to a low participation rate in the district’s food service. FCMAT reviewed cafeteria expenditures through October 2019 and projected expenditures through June 2020. Using the 2018-19 first interim expenditures as a percentage of associated unaudited actual expenditures, indicates that annual projected expenses are underbudgeted by approximately $55,000. In 2017-18 and 2018-19, cafeteria contribution estimates were overestimated. When a fund draws on the general fund for support, a review and analysis of expenditures at all reporting periods should be applied. Additionally, annual increases due to step and column and minimum wage increases should be included in the MYFP. This would increase transparency about the true cost of the food service program. Special Reserve Fund Postemployment (Fund 20) is a restricted fund used to support the payment of OPEB ex- penses. If the district budgets the 2019-20 OPEB at the same rate as incurred at first interim, levies will be sufficient to cover the current reported expenses, and any excess may be deposited to this fund in reserve for future use. Building Fund (Fund 21) is a restricted projects fund used to account primarily for bond revenue and expens- es and AB1290 pass through funds from the successor agency of the city of Santa Cruz (formerly known as Redevelopment Agencies-RDAs ). The fund receives approximately $3 million per year from the former RDA, a portion of which is transferred to the general fund to support RRMA. The first interim budgeted a $614,000 transfer, followed by $449,000 in 2020-21 and $284,000 in 2021-22. While city of Santa Cruz RDA revenues not subject to the LCFF deduction (object 8625) are restricted to educational facilities per Health and Safety Code Section 33607.5(a)(4)(A) and Education Code Sections 42238(h)(6), 42238.02(j)(6), and 42238.03(c)(6), many districts deposit the revenues in the general fund and transfer them to facilities funds using the 8150 resource code. This is a source of income with good historical data on which to base estimates, and could substantially alleviate the amount of ongoing annual RRMA expenses covered by the general fund. Recommendations The district should: 1. Closely monitor the cafeteria expenses to ensure that spending estimates are reasonably accurate. 2. Evaluate the cafeteria services revenues and expenditures. Explore strategies to make the cafeteria program self-sustaining such as production efficiencies, participation rates, meal pricing, and commodity purchasing discounts. 3. Consider budgeting and transferring excess OPEB levies to Special Reserve Fund 20. 4. Consider using RDA funds to reduce the 3% RRMA contribution in the unrestricted general fund. To do this the district may deposit RDA funds into the general fund and use them to support RRMA qualifying projects or then transfer RDA funds to a facilities fund and coding transfers to 8150 resource. Fiscal Crisis and Management Assistance Team Santa Cruz City Schools 23 Findings and Recommendations Revenue Enhancements and Expenditure Reductions Revenue Enhancements and Expenditure Reductions Enrollment, ADA and Unduplicated Pupil Percent (UPP) Much of a school district’s revenue is founded on enrollment, ADA, and UPP. Therefore, by increasing en- rollment, attendance, and the percentage of students properly identified as unduplicated pupils, a district can increase its revenues. Focus on optimizing the district’s ADA rate to enrollment will ensure ADA-driven funding is maximized. This will lead to increased funding from the state LCFF, which accounts for more than 70% of the district’s general fund revenue. Various methods can be used to increase student attendance, including incentives, parent education and automated truant student parental notification systems. Timely parent notification is critical to increasing daily attendance and preserving its correlated funding. When developing its annual school calendar, the district needs to consider the effects of mid-week holidays, religious and cultural holidays, staff development days and other days students commonly miss school. Anal- ysis of historical attendance trends can shed light on periods of the school year when attendance is below average. For students going on a planned leave of more than five days, the district should consider offering short-term independent study. Saturday school can help recover time lost from truancy. The CDE provides a listing of strategies and activities to help encourage students to attend school regularly. The guidance can be found at the following web address: https://www.cde.ca.gov/ls/ai/cw/attendstrategy.asp. The district should take steps to ensure it maximizes the number of identified free and reduced lunch stu- dents. The direct certification process can help with this, particularly when direct certification matches are performed at least monthly. For students who are not directly certified, the district can offer meal applica- tions online, help parents who need assistance completing the application and offer incentives to parents or students to submit applications. The district needs to retain documents to support the eligibility determi- nation and establish practices to audit samples of documents received. Facilities Use Fees The district charges fees for the use of its facilities. Under the Civic Center Act, the district is eligible to fully offset the costs for use of district facilities associated with use. Although the district increased the cost for facilities use July 1, 2019, it appears that the hourly rate for custodial/classified staff to support events in the use agreement is significantly less than the true salary expenditure. The civic center rate charged for use of facilities is 32% less than the mean salary plus statutory benefits (not including health benefits) for custodial support. Further even though a significant amount of the facility use occurs outside of regular staff hours, there is also no additional cost to the user to account for employee overtime. An annual review of the fee structure should be conducted to ensure the charges are appropriate and the revenues gained fully recoup the expenses associated from facility usage. The district will then need to en- sure that it is consistent in charging all groups and individuals in accordance with the board approved use of facilities fee schedule. Sales of Surplus Equipment The district can sell unused or obsolete property that ranges from supplies or equipment, including comput- ers and servers to district vehicles. Regularly reviewing and taking inventory of all fixed assets can help guide the district in its evaluation of existing surplus supplies and equipment. For larger items such as vehicles, or items held in bulk, the district can contract with private auction companies to ease the surplus sale process. Fiscal Crisis and Management Assistance Team Santa Cruz City Schools 24 Findings and Recommendations Revenue Enhancements and Expenditure Reductions Transportation Interviews indicate that the Transportation Department transports students countywide on behalf of other districts. Interviews with the business office and a review of funding documents could not identify any bill- ings or credits received from the county office in exchange for this service. The school districts in Santa Cruz County have an interagency agreement, which was board approved August 28, 2019, that ensures transportation for students in foster care. This can become a template for the establishment of minimum rates although the rates are for reciprocal services and do not appear to cover the total cost of operations. In 2018-19 the district expended more than $18,500 in transportation contracts for special needs students in addition to paying $92,000 to nonpublic schools for transportation. Education Code 39802 establishes the requirements for procuring transportation for disabled students at the lowest possible figure consis- tent with proper and satisfactory service. Whenever a transportation expenditure of more than $10,000 is involved, the governing board is required to secure bids according to Sections 20111 and 20112 of the Public Contract Code. These sections apply if the district plans to contract with a person or corporation other than a common carrier or a municipally owned transit system or a parent or guardian of the transported pupils. Interviews indicated that for the last five years, the district has not gone to request for proposal (RFP) to seek competitive bids for special education transportation services. The district has an obligation to ensure it receives the best service at the lowest rate. Developer Fees School districts are authorized to levy a fee against any construction within their boundaries to fund the construction or reconstruction of school facilities necessitated by the development. (Ed. Code, §17620(a)(1).) School impact fees, commonly known as “Level 1” or developer fees, are adjusted for inflation every two years. On January 2020, the State Allocation Board (SAB) authorized an increase in the maximum Level 1 fee per square foot as follows: Residential Construction: School districts may charge up to $4.08 per square foot of assessable space of new residential construction. Commercial/Industrial Construction: School districts may charge up to 66 cents per square foot of chargeable covered and enclosed commercial/industrial space. The district website indicates it levies only $3.36 per square foot for residential (nonsenior rate) and 58 cents per square foot for commercial construction. These are significantly less than the allowed rate even though various interviews indicate that the district has significant unmet facilities needs. Fidelity to Staffing Ratio Levels The staffing formula provided to FCMAT does not account for positions paid for by funds that are one-time in 2019-20 and discontinue in 2020-21. The district has charged approximately $280,000 in salaries and benefits to restricted programs, which must be eliminated or charged to the unrestricted general fund in 2020-21. Multiple interviews indicate that no positions are closed, and the funding source is changed to unrestricted. The Business Services Department reduces expenses in the MYFP; however, others believe there is no negative impact on the budget from replacing a position, or moving an individuals’ funding source to the general fund, because the “savings” is never budgeted. Interviews indicate that no layoffs have occurred because of reductions to categorical funding changes. Fiscal Crisis and Management Assistance Team Santa Cruz City Schools 25 Findings and Recommendations Revenue Enhancements and Expenditure Reductions Interviews indicate that the district has an open enrollment program. When estimates of school attendance numbers are inaccurate, instructors are not transferred from overstaffed to understaffed schools, and ad- justments at the high schools are not made mid-year. The district does have involuntary transfer rights, per article XII in the Greater Santa Cruz Federation of Teacher contract, to adjust staffing between sites. Reductions Spending and Hiring Freeze The district has experienced an enrollment decline each year for the past several years. It should consider implementing a hiring freeze. Any position vacated by retirement, resignation, or other means should be thoroughly evaluated before being filled. This evaluation should assess the potential to transfer person- nel at sites that exceed district-adopted staffing levels and determine if the position needs to be closed or restructured. Additionally, the district could consider a freeze on all overtime and extra duty hours. Any additional work that is deemed necessary should require justification and advance approval by the chief business official (CBO), or designee. Special Education Extraordinary Cost Pool The district should ensure that it participates consistently in all qualifying special education funding sources including the extraordinary cost pool. The extraordinary cost pool is established to protect districts against any large unanticipated special education costs. As part of the special education AB 602 formula, the pro- gram reimburses participants for extraordinary costs of serving students placed in nonpublic, nonsectarian schools and special education and related services for students who reside in licensed children’s institu- tions. Information about the program is located on the CDE website at https://www.cde.ca.gov/fg/aa/se/ senpslciecp.asp Recommendations The district should: 1. Implement measures to maximize district enrollment and ADA and ensure accurate identification and reporting of the district’s UPP. 2. Annually evaluate and update facility use fees to ensure full costs associated with facility use are recouped. 3. Review inventories of supplies, equipment and properties to determine if obsolete or surplus exists. Consider selling items no longer needed and useful to the district. 4. Review the transportation services provided by the district and those contracted. 5. Negotiate an Interagency agreement to recoup the expenses for regional transportation on behalf of other districts. 6. Issue an RFP to ensure procurement of transportation services for disabled students to a qualified provider at a competitive rate. 7. Regularly conduct a developer fee justification study to determine the relationship between the amount and types of development in the school district and the need for additional school facilities. This study should be the basis for justifying and collecting the maximum allowable developer fees. 8. Reconcile position control with established staffing ratios to determine the appropriateness of staffing and identify and implement a plan of correction as needed. Fiscal Crisis and Management Assistance Team Santa Cruz City Schools 26 Findings and Recommendations Revenue Enhancements and Expenditure Reductions 9. Consider implementing more restrictive controls or freeze on hiring, overtime and extra duty to ensure that all excess employment costs are deliberate. 10. Ensure it participates in the SELPAs extraordinary cost pool to reduce the impact of any qualifying large unanticipated special education costs. Fiscal Crisis and Management Assistance Team Santa Cruz City Schools 27 Findings and Recommendations Business Services Business Services Business Services Department is led by a director of finance that reports to the assistant superintendent of business services. Reporting to the director of finance are a supervisor of finance, two lead account techni- cians, an accounts payable technician, and two payroll technicians. The Business Services team is respon- sible for developing and maintaining the district’s budget, processing payables and receivables, completing internal and external fiscal reporting and monthly payroll processing. The workload of this business services team is unique in that SCCS is essentially two LEAs, Santa Cruz City Elementary and Santa Cruz City High school districts, that are governed, administered and reported as one. To accomplish the district’s budgeting and reporting, calculations must be made for each district and then combined into the one reporting unit. This process nearly doubles the workload on the SCCS fiscal services team compared to most other districts of similar size and composition. Budgeting and Compliance The director of finance and supervisor of finance are the primary leads for the development and mainte- nance of the district’s budget. They work to develop the district’s revenue projections, make certain posi- tion salary and benefits are reflected accurately in amount and account coding in the financial system, help create fiscal policies and procedures and ensure the district’s fiscal integrity. The director of finance position is vacant and the role is temporarily filled by a prior director of finance who provides services remotely from out of state. The capabilities and familiarity of the interim person serves the district well, but should not be considered a permanent solution because of the workload and interac- tion limitations of the remote location. The district complies with the state’s financial requirement timelines of budget adoption and interim budget updates. All budgets are developed using the Escape financial software system and other fiscal tools and ad hoc reports, such as Microsoft Excel. Per state-mandated reporting periods, all budget and actuals data is formatted in the CDE’s SACS accounting software. The school board is responsible for the approval of each budget update and end-of-year unaudited actuals. The county office is responsible for fiscally evaluat- ing the district’s board-certified budget. The district plans and utilizes the assignment designation within the CDE’s SACS reporting software to communicate future obligations of its ending fund balance to the board and public. The district has cre- ated multiple complex spreadsheets to track staffing and expenses. These reports are used as the build- ing blocks to provide an accurate current and projected depiction of revenues and expenditures and the resulting financial position. The Escape financial system is utilized to house the budget, actuals and basic reporting needs. At the conclusion of each year, the district compiles its unaudited actuals report and presents the year -end fiscal standing of the district to the board. The unaudited actuals report is audited by an independent third party audit firm, presented to the board and submitted to the state. Fiscal Crisis and Management Assistance Team Santa Cruz City Schools 28 Findings and Recommendations Business Services Recommendations The district should: 1. Hire a full-time director of finance. Proper staffing will help to ensure past audit findings, such as the overstatement of cash in the district’s building fund and misreporting of the district’s UPP, do not become an annual trend. 2. Develop a standard budgeting training packet and a schedule for staff training. Instructional administrators and support staff should have training on the district’s fiscal policies, practices and expectations upon hire. Opportunities should be available for annual trainings and attendance required at least biennially, when significant changes occur, or weaknesses in controls found. 3. Establish clear budget development and budget update timelines with internal fiscal staff, as well as all applicable support staff. The creation of an internal department calendar and a districtwide calendar of important dates will assist in the preparation and compliance needs of the district. This will provide additional structure for internal department operations and serve as a guide for nonfiscal staff. 4. Establish a budget development framework in the months before the board’s budget adoption hearing. These study sessions should provide opportunity for board and district leadership dialogue and input and will help fiscal staff develop an adopted budget that reflects anticipated needs and communicate upcoming potential expenses to district leadership. Position Control The district maintains a position control document in the countywide system. Interviews indicate it is not reconciled to the staffing formula. Administrators are asked to periodically review the people assigned to their sites/divisions although this is not routinely completed, and administration performs body counts to verify actual staffing. Several divisions reported discrepancies regarding positions in their budgets and be- tween position control documents and actual pay rates. In addition, there was confusion regarding position assignments to sites. Recommendation The district should: 1. Regularly reconcile the position control document to both staffing and payroll and distribute monthly to managers for input, feedback and correction. Accounts Payable and Receivable The two lead account technicians and an accounts payable technician positions are responsible for the dis- trict’s accounts payable and receivable operations. These positions serve to process all payments, invoice vendors for payment and receipt of funds to the district. The district has an established accounts payable procedures guide. The guide addresses both the external pro- cessing of physical invoices received by the district and electronic processing of payments via the district’s Es- cape accounting software. The guide has been developed as a step-by-step reference manual on how accounts payable is to process payments. The guide addresses required steps to establish a vendor in the system, pro- cess transactions, audit transaction primary and supporting documentation, and release batches for payment. Fiscal Crisis and Management Assistance Team Santa Cruz City Schools 29 Findings and Recommendations Business Services The Accounts Payable Department provides staff with multiple avenues for purchasing including; purchase order, pay voucher (“payment type D”), credit card and petty cash. Purchase orders are the district’s pre- ferred method of establishing payment agreement with a vendor. Payments to vendors are made via check and printed by the county office. Printed checks are returned to the district, where they are reviewed and mailed to the vendor. When envelopes are stuffed, a check im- age is printed from the Escape financial system and attached to the payment’s corresponding backup. The county office audits all of the payments for accuracy and notifies of errors, omissions, or irregularities. Policy specifies that district credit cards should be used only for emergencies or when vendors will not ac- cept purchase orders. Orders per purchase are capped at $400. Additional unauthorized uses are specified and instructions on compliance and documentation are listed. Each holder is required to sign the accept- able use policy along with his or her supervisor. However, the consequences for misuse are not identified. The Purchasing Department developed a “comparative shopping guide” to assist staff and encourage com- petitive purchasing processes. The Business Services Department works with Purchasing to communicate annual purchase order and stores cutoff dates. The creation of purchase orders ends on April 15 unless approved by the Purchasing Department. Stores orders end on May 31, and departments are notified that all goods and services for purchase orders must be received before June 30. Guidelines for employee reimbursement of expenses including travel and purchasing should be established and documented to ensure district requirements are followed and employees are properly and timely reim- bursed for appropriate employee burdened expenses. The lead account technician is the primary staff member responsible for accounts receivable. A standard- ized accounts receivable document has been developed by the district, which provides the user guidance from invoicing a vendor to the receipt of cash from the vendor. A cash handling procedure documents inter- nal organization and external organization cash handling and deposit steps, but does not include timelines or frequency of deposits requirements. Both documents address the process and technical steps needed to receive funds. The guidance provides instruction and documentation examples and is structured in such a way that a system of checks and balances ensures process integrity and fraud prevention. Interviews indicated that while site staff have cash collections counted twice, the counts are not performed by two individuals together. Recommendations The district should: 1. Establish an accounts payable and receivable user’s manual for all procedure and guidance documents. This will provide a single resource for uniform guidance practices. 2. Include guidelines clearly specifying what is needed to establish a vendor (W-9) and for situations where additional tax withholding can be necessary. (https://www.ftb.ca.gov/pay/ withholding/backup-withholding.html) 3. Add references to staff position titles in any district guidance or instructional document. Current guides rely on the first names of individuals to specify who is responsible for what action. This causes guides to become outdated when staff change positions and creates confusion when multiple district staff members have the same first name. 4. Incorporate information from the Purchasing Department’s comparative shopping guide into the accounts payable procedural guides. The criteria and guidelines outlined in this Fiscal Crisis and Management Assistance Team Santa Cruz City Schools 30 Findings and Recommendations Business Services document can be included in the accounts payable guide as a reference for auditing purchase documentation. 5. Review the existing guides to ensure the instructions agree with each other. Different guides and documents may reference identical processes and need to be updated simultaneously to avoid inconsistencies. 6. Develop standard operating procedures or a policy that clearly specifies signature authority for various actions and the process for approving them (e.g., travel and conference, purchases). 7. Establish a policy that lists reimbursement guidelines for employee travel and conference- related expenses, as well as expectations as to the timeliness of the submission of post- travel claims. 8. Explore systems that would allow current paper forms to be electronically routed and signed. This will increase the district’s uniformity of process and fiscal compliance and improve efficiency and accessibility. 9. Establish a range of times for staff to take deposits and a schedule that requires employees to alternate in transporting the deposit to and from the county office. 10. Specify in the credit card acceptable use policy the consequences if the cardholder violates the rules specified in the policy. 11. Create a guide of commonly used account codes for internal and external departments to use, helping to standardize coding on regular purchase activities. This will help reduce coding errors and the necessity of generating corrective journal entries. The document will also help establish the appropriate use of object codes. 12. Assign a district individual to review bills before payment to confirm accuracy. 13. Assign two individuals to count cash together, instead of performing the count at different times. Payroll The payroll services section of the Business Services Department consists of two payroll technicians who report directly to the director of finance. These technicians are responsible for processing and posting certificated and classified payroll, reviewing hourly employee time cards, ensuring benefits calculations and payments support and maintaining employee payroll records. The district’s Escape financial system is used to electronically run payroll and maintain employee system records. The Payroll Department operates through internal department and external department deadlines. An annual calendar specifying dates per month for regular and supplemental payroll is created and distributed to departments to alert them of due dates. These due dates include when paperwork is due to finance, HR, and payroll. The district also receives a formalized schedule of dates when items are due or available to be received from the county office. Payroll is run twice a month. The regular payroll is paid at the end of the month, and supplemental payroll is paid on the tenth. Supplemental payroll includes payroll for extended work agreements, time sheets and new hires. FCMAT found no concerns or inherent issues with the processing of payroll or to employee payments. Con- sistent training and procedural review is needed to maintain error-free and timely processing of payroll. Fiscal Crisis and Management Assistance Team Santa Cruz City Schools 31 Findings and Recommendations Business Services Recommendations The district should: 1. Provide an annual training to all department staff who complete and review time sheets, extended work agreements or any other monthly-submitted payroll related documents. Focus on compliance, procedural requirements and the application of information provided into the payroll process. 2. Establish a payroll user guide for internal department use. Specify document needs, audit processes and input guidelines. This guide will help enable a smooth transition when staff change positions and assist in cross-training between the two payroll technicians. 3. Once the new director of finance is hired, perform a review of all processes and forms to ensure proper documentation and audit review occurs. This should be a priority. The review should include monthly and nonmonthly process flows between all departments and payroll and an evaluation of bargaining unit and salary schedule information between HR and payroll. 4. Ensure payroll staff receives annual compliance training, including, but not limited to, STRS and PERS reporting. 5. Begin an evaluation of current forms, processes and systems. Determine how the current physical (paper based) system can transition to an electronic routing, review, approval and storage system. Fiscal Crisis and Management Assistance Team Santa Cruz City Schools 32 Appendices Appendices A. Financial Dartboard B. Study Agreement Fiscal Crisis and Management Assistance Team Santa Cruz City Schools 33 Appendices A. - Financial Dartboard SSC School District and Charter School Financial Projection Dartboard 2020-21 Governor’s Proposed State Budget This version of School Services of California Inc.’s (SSC) Financial Projection Dartboard is based on the 2020–21 Governor’s State Budget proposal. We have updated the cost-of-living adjustment (COLA), Consumer Price Index (CPI), and ten-year T-bill planning factors per the latest economic forecasts. We have also updated the Local Control Funding Formula (LCFF) factors. We rely on various state agencies and outside sources in developing these factors, but we assume responsibility for them with the understanding that they are general guidelines. LCFF GRADESPAN FACTORS Entitlement Factors Per ADA* K–3 4–6 7–8 9–12 2019-20 Base Grants $7,702 $7,818 $8,050 $9,329 COLA at 2.29% $176 $179 $184 $214 2020-21 Base Grants $7,878 $7,997 $8,234 $9,543 Grade Span Adjustment Factors 10.4%   2.6% Grade Span Adjustment Amounts $819   $248 2020-21 Adjusted Base Grants $8,697 $7,997 $8,234 $9,791 Supplemental Grants (% Adj. Base) 20% Concentration Grants (% Adj. Base) 50% Concentration Grant Threshold 55% *Average daily attendance (ADA) PLANNING FACTORS Factors 2019–20 2020–21 2021–22 2022–23 2023–24 Statutory COLA1 3.26% 2.29% 2.71% 2.82% 2.60% California CPI 3.09% 2.99% 2.89% 2.69% 2.73% Unrestricted per ADA $153 $153 $153 $153 $153 California Lottery Restricted per ADA $54 $54 $54 $54 $54 Mandate Block Grant Grades K–8 per ADA $32.18 $32.92 $33.81 $34.76 $35.74 (District) Grades 9–12 per ADA $61.94 $63.36 $65.08 $66.92 $68.81 Mandate Block Grant Grades K–8 per ADA $16.86 $17.25 $17.72 $18.22 $18.73 (Charter) Grades 9–12 per ADA $46.87 $47.94 $49.24 $50.63 $52.06 One-Time Discretionary Funds per ADA      Interest Rate for Ten-Year Treasuries 2.07% 2.25% 2.51% 2.50% 2.60% CalSTRS Employer Rate2 17.10% 18.40% 18.10% 18.10% 18.10% CalPERS Employer Rate3 19.721% 22.80% 24.90% 25.90% 26.60% STATE MINIMUM RESERVE REQUIREMENTS Reserve Requirement District ADA Range The greater of 5% or $69,000 0 to 300 The greater of 4% or $69,000 301 to 1,000 3% 1,001 to 30,000 2% 30,001 to 400,000 1% 400,001 and higher 1Applies to LCFF, Special Education, Child Nutrition, Preschool, Foster Youth, American Indian Education Centers/American Indian Early Childhood Education and Mandate Block Grant. 2California State Teachers’ Retirement System (CalSTRS) rates in 2019–20 and 2020–21 are final. Rates in the following years are subject to change based on determination by the CalSTRS Board. 3California Public Employees’ Retirement System (CalPERS) rate in 2019–20 is final. Rates in the following years are subject to change based on determination by the CalPERS Board. © 2020 School Services of California, Inc. As of January 15, 2020 Fiscal Crisis and Management Assistance Team Santa Cruz City Schools 34 Appendices B - Study Agreement Fiscal Crisis and Management Assistance Team Santa Cruz City Schools 35 Appendices Fiscal Crisis and Management Assistance Team Santa Cruz City Schools 36 Appendices Fiscal Crisis and Management Assistance Team Santa Cruz City Schools 37 Appendices Fiscal Crisis and Management Assistance Team Santa Cruz City Schools 38 About FCMAT Fiscal Crisis and Management Assistance Team Santa Cruz City Schools 39