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“Early Warning” Legislation Enacted
Governor Snyder recently signed a bill package to earlier identify and resolve fiscal stress in schools that combines enhanced financial reporting, “potential” fiscal stress determinations, modified deficit elimination plan requirements, and state aid withholding. This article summarizes the legislation.
Public Act 109 of 2015 adds a new Section 1219 to the Revised School Code to require certain school districts and PSAs (collectively, “schools”) to report specific financial information to the Michigan Department of Treasury (“Treasury”) and allow Treasury to make earlier fiscal stress determinations.
- Before July 7 of each year, a school with a general fund balance under 5% of its general fund revenues in either of the two most recently completed fiscal years must transmit its budgetary assumptions to the Center for Educational Performance and Information (CEPI), which will forward the assumptions to Treasury. Budgetary assumptions are projections used in creating an annual budget, which minimally include the foundation allowance, pupil membership, and current and previous fiscal year per-pupil expenditures. Although PA 109 was not enacted until July 7, 2015, and thus the mandate to report budgetary assumptions arguably is not effective until the 2016-2017 fiscal year, Treasury has taken the position that the reporting requirement in PA 109 is effective in the 2015-2016 school year and has reportedly worked with CEPI to extend the 2015-2016 deadline to August 7, 2015.
- If Treasury determines that a school or ISD may develop an operating deficit, cannot meet its financial obligations, or otherwise has the “potential” for fiscal stress, then Treasury may declare a potential for fiscal stress. The determination must be based on specific statutory criteria, including audited financial statements, the budget, enrollment data, and other financial information provided to the State.
- After Treasury’s determination of the potential for fiscal stress, a school may contract with an ISD (a PSA may also contract with its authorizing body) to review the school’s finances and recommend steps to avoid a deficit. After Treasury’s notification, the school would have sixty (60) days to enter into a contract with the ISD or authorizer to review its finances. The ISD or authorizer, as applicable, must consult with Treasury on the development of the contract and report to Treasury quarterly on the school’s implementation of the recommendations.
- Treasury may require a school or ISD with the potential for fiscal stress to submit periodic financial reports if all of the following criteria are met:
- More than 60 days have passed since the school or ISD was notified of its potential for fiscal stress;
- In the case of a school, the school has not entered into a contract with an ISD (or authorizing body for a PSA), or a contract has been rescinded;
- The school or ISD has not had a positive general fund balance of at least 5% for the two most recent fiscal years;
- The school or ISD has had a declining general fund balance in one or both of the two most recent school fiscal years; and
- The school or ISD is not required to submit a deficit elimination plan (DEP) or enhanced deficit elimina-tion plan (EDEP).
- Treasury also may require a school to submit periodic financial reports if it fails to implement any of the ISD’s or authorizer’s recommendations, as applicable, within 365 days of being notified of the potential for fiscal stress.
- Treasury may require a school or ISD whose periodic financial reports indicate fiscal stress or a general fund deficit in the current or subsequent fiscal year to submit an EDEP. Treasury may require an EDEP if the school or ISD fails to submit periodic financial reports.
Deficit Elimination Plans
Public Act 111 of 2015 adds Section 1220 to the Revised School Code to govern DEPs. PA 111 shifts many of the old DEP requirements into the new Section 1220, codifies certain MDE practices, and adds new requirements.
- A school or ISD must: (1) immediately notify the State Superintendent and Treasurer of a deficit and provide a copy of the notice to the school district’s ISD or the PSA’s authorizer; and (2) submit an amended budget and a DEP to the State Superintendent, the Treasurer, and, for a school, either the school district’s ISD or the PSA’s authorizer.
- As before, MDE may withhold state aid payments to a school or ISD until its DEP has been submitted and approved.
- The State Superintendent may require a DEP to include an academic plan.
PA 111 also governs the newly-created EDEP. If, based on a DEP, periodic financial reports, or a request by the State Superintendent, Treasury determines that a school or ISD is experiencing rapidly deteriorating financial conditions, persistently declining enrollment, or other indicators of financial stress, Treasury may require the school or ISD to submit an EDEP. If a school or ISD does not eliminate its deficit within five years after it submitted its initial DEP, it must submit an EDEP.
- An EDEP must include measures to address financial deterioration, persistently declining enrollment, any recurring operating deficits or financial stress, and may provide for eliminating a deficit within a prescribed period or any other special conditions determined by Treasury.
- An EDEP is subject to Treasury’s approval.
- As a condition of approving an EDEP, Treasury may require a school or ISD to enter into a financial recovery agreement, which may provide for assistance and guidance from Treasury, a financial and operating plan, the appointment of a local auditor or inspector, or other remedial measures.
- As with a DEP, Treasury may withhold state aid payments until a school or ISD submits an acceptable EDEP.
State Aid Withholding
Public Act 114 of 2015 amends Sections 17a and 18 of the State School Aid Act to expand MDE’s authority to withhold state aid from a school or ISD in certain circumstances.
- Treasury may withhold state aid to secure the repayment of certain additional debt obligations.
- If a school or ISD fails to adopt a budget complying with the Uniform Budgeting and Accounting Act (UBAA), MDE or Treasury may withhold up to 10% of a school’s or ISD’s state aid payments until the school or ISD adopts a UBAA-compliant budget.
- If the noncompliance is not corrected by the end of the fiscal year, the school or ISD forfeits the amount withheld.
Local Financial Stability and Choice Act and Emergency Municipal Loan Act Amendments
Public Acts 110 and 113 of 2015 amend the Local Financial Stability and Choice Act, which is often referred to as the Emergency Manager Law.
- PA 110 shifts the state financial authority from MDE to Treasury for a school district or ISD with a DEP and requires Treasury to conduct a preliminary review of a school district or ISD that has not submitted or complied with its DEP or whose DEP eliminates the deficit over a period exceeding five years.
- PA 113 allows Treasury to declare a financial emergency and recommend that the governor appoint an emergency manager for a school district or ISD that has failed to submit, or to a comply with, an EDEP.
Public Act 115 of 2015 amends the Emergency Municipal Loan Act to raise the cap on emergency loans to school districts to $70,000,000 but prohibits emergency loans to Detroit Public Schools.
The early warning legislation is a comprehensive overhaul to the various statutes addressing fiscal stress in schools. MLive predicts that up to 171 Michigan schools will be affected. Please note than many details of this expansive bill package are beyond the scope of this brief article. Nevertheless, this summary provides a practical overview of this legislation’s scope and intent. Many unanswered questions exist regarding the legislation’s implementation. We expect MDE, Treasury, and CEPI will provide administrative guidance and procedures in the future. We will update our clients as more information becomes available.