In Chapter 4, we examined the primary sources of revenue to understand where school districts find the dollars to operate. In this chapter, we will focus our attention on the other side of the equation, expenditures; that is, school district spending. A good starting point for our discussion is to understand the definition of a school district budget as well as the unique accounting structure, fund accounting, under which Illinois public schools function.
What exactly is a school district budget? In its most basic form, a budget is a school district spending plan approved by the local board of education that allows the district administration the authority to spend district funds. Since only the board of education has legal authority to expend district funds, all expenditures must be approved by the board.
In Illinois, school districts are required by law to report school spending through a fund accounting process (Braun, 2010). Fund accounting is very different from that used in the business world and therefore sometimes appears foreign to new school board members and residents.
Under this accounting structure, a school district’s budget is divided into several individual funds to which certain revenues are assigned and expenditures deducted. A good way to conceptualize fund accounting is to think of each fund as a separate checkbook established for specific expenses. For example, teacher salaries can be paid from the Education but not the Transportation Fund.
School district budgets are composed of several specific funds which are somewhat expenditure specific and governed by state regulations including transfer restrictions (Braun, 2010). By requiring that certain expenditures be paid from specific funds, Illinois helps ensure that school districts do not, for example, postpone important maintenance projects to fund teachers' salaries. The Illinois State Board of Education defines each of these funds in its 23 Illinois Administrative Code 100.Table A. What is most important for you to understand are not the plethora of requirements associated with fund accounting but rather the structure and basic characteristics of each fund.
The Education Fund is by far the largest and most versatile of all funds and is used for the bulk of school district expenditures including educational expenses such as salaries and benefits related to the instructional program, administration, educational materials, staff development, childcare programming, special education, and the lunch program. The Education Fund also includes a sub-fund for Special Education. In fact, any district expense not specifically included in another fund can be paid from the Education Fund.
Expenses related to the operation and maintenance of facilities including employee salaries, benefits, contractual maintenance, supplies, utilities, and capital improvement projects are included in this fund. Revenues for the Operations and Maintenance Fund come from property taxes, building rental, and interest income.
As the name indicates, this fund focuses on transportation expenses. The Transportation Fund receives revenues from property taxes, student fees, and state transportation aid, which are used for such expenditures as driver salaries and benefits, contract bus service costs, gasoline, maintenance, and transportation-related insurances.
Non-certified employees such as teacher assistants or custodians who work a minimum of 600 hours a year participate in a pension plan called the Illinois Municipal Retirement Fund (Illinois Municipal Retirement Fund, 2008). The school board collects property taxes and also utilizes CPPRT and interest to make payments on behalf of eligible employees to IMRF. This fund also pays the board share of social security and Medicare. This fund is supported primarily by property taxes.
The Debt Service Fund (formerly the Bond and Interest Fund) uses tax revenues to pay the principal and interest on bonds and service charges on other long-term debt instruments. Long-term is defined as a minimum of thirteen months. This fund also is used for payment of capital leases for such items as copiers, using funds transferred from the Education Fund.
This fund is used to pay for major facility related capital improvements. Revenues for this fund can come from property taxes or building bond proceeds.
This fund is limited to paying expenses for capital improvements approved by the State of Illinois as life-safety projects. Revenues for this fund can come from property taxes or life-safety bond proceeds.
For all practical purposes, the Working Cash Fund is a cash flow account that a school district can tap as needs dictate. The Working Cash Fund can accept property tax receipts or proceeds from the sale of certain school bonds; however, no expenditures can be made from it. Rather, this fund can lend dollars as needed to other funds. Some or all of the fund’s reserves may be permanently transferred to another fund. Specific laws govern these types of transactions.
The Tort and Immunity and Judgment Fund is used to pay the cost of district insurance and risk management as well as payments or tort judgments. It is funded through tax levies and/or bonds.
Under fund accounting, school district expenditures within each fund are categorized in two ways: purpose and type. First, expenditures are designated by their purpose or “function”:
Within each of the above categories, expenditures are further assigned to a specific subcategory. For example, in the Education Fund, instruction expenditures are defined as one of ten sub-purposes:
In addition to being categorized by purpose, Expenditures must also be identified by type or “object”. As a result, each is assigned to one of the following:
To illustrate this process, let’s consider how the cost of board-paid teacher dental insurance would be designated. First, it would be charged to the Education Fund since it is an educational expense. It would be further categorized under Instruction as Regular Programs and an Employee Benefit.
This accounting code system was created to achieve some comparability and accountability in reporting among Illinois school districts. Under this system, the Illinois State Board of Education is able to generate a variety of reports of which the most recognizable is the Illinois State School Report Card, an accountability document aimed at the public.
Although some of the sub-categories such as salaries and employee benefits are self-explanatory, the others require some definition. Please find below examples of the most common categories of expenditures found under these.
See below a copy of the Education Fund Expenditure portion of the ISBE form, Statement of Expenditures Report (Illinois State Board of Education, 2008b). It shows both the expenditure categories, sub-categories, and purposes. You will see that the expenditure categories are listed in bold print down the left side with sub-categories indicated below each. Across the top of the form, each of the eight purposes is identified.
| STATEMENT OF EXPENDITURES REPORT |
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Besides ensuring continuity of school district financial reporting, the prescribed fund accounting procedures are essential to the completion of various state reports. Discussed below are several reports which must either be completed by the school district or generated by the Illinois State Board of Education based on school-district supplied data. School districts are required to submit their budgets after local school board approval to the ISBE by the end of September. Since it is a budget, this is the school district spending plan for the year.
After the end of the fiscal year, school districts submit a report entitled the Annual Financial Report (AFR), which documents the actual spending of district funds. The district’s revenues and expenditures are verified as part of the mandated annual audit conducted by an independent outside municipal accounting firm. Both of these are prepared under the ISBE-mandated fund accounting structure.
School districts are required to have their financial records audited annually by an independent auditor approved the board of education. The primary purpose of an audit is to examine the school district’s financial records to determine if they fairly represent the school district’s financial position. The audit also provides a review of the school district’s internal bookkeeping procedures and controls.
School districts that operate under an overall deficit budget must complete a mandated Deficit Reduction Plan in which they explain how they plan to eliminate their deficit (Braun, 2010). This process emerged after a school district reached a severe financial crisis stage and the state legislature determined that the school district financial monitoring process was not adequate. For this report, the definition of deficit is different from that used in our earlier discussion of an annual district deficit.
When we discussed local school district deficits in Chapter 1, a budget deficit was defined as any yearly budget in which expenditures were exceeded revenues. Districts, though, even with annual budget deficits, usually have sufficient reserves to offset anticipated shortfalls. Under the Deficit Reduction Plan, these districts would not be required to submit a plan. Only those school districts which did not have projected reserves to offset the projected deficit must develop a budget reduction plan. Since most districts, even those with annual budget deficit generally have some reserves, only those in the most financial difficulty would be required to do so.
Since FY99, school districts have been required to limit administrative expenditure increases to 5%. School district administrators must ensure that designated budget line items related to administrative costs do not exceed this limit when submitting their school district’s annual budget and Annual Financial Report to ISBE (Braun, 2010).
School district employees and school board members have an important ethical and moral obligation to manage and account for school district funds, especially for the benefit of students. This is called their fiduciary responsibility.
Annually, all Illinois school districts receive a School District Rating from the Illinois State Board of Education. Its primary purpose is to analyze and monitor the finances of school districts (Illinois State Board of Education, 2004).
The Illinois State Board of Education (2004) utilizes five financial indicators in arriving at a district’s designation.
Using a quantitative score and weighting system for the indicator, school districts are assigned to one of four categories:
For most school districts, the School District Financial Profile has relatively little significance. Its greatest impact is primarily political. For example, it is not uncommon for a school district to be rated in the Financial Recognition category because at the moment it has a overall reserve but at the same time is trending toward financial difficulty due to a growing school budget deficit. The high rating may be a stumbling block for school districts that hope to pass an operating fund referendum now rather than wait until the district is approaching crisis. More specific information on the Illinois School District Financial Profile system is available on the Illinois State Board of Education website (http://www.isbe.state.il.us).
School districts use various methods to establish the actual budget amount in line items particularly at the school level. Costs for such items as salaries and benefits are generally linked to staffing levels, negotiated contracts, insurance premiums, and local board policies and therefore are calculated based on these factors. However, for school-level budget items for which the administration has substantial control such as instructional materials, supplies, and capital expenditures, district level administrators often approach the budgeting process from different perspectives. The two most common budget allocations approaches are fixed allocation and zero-based budgeting.
A popular approach employed by school district central office administrators to allocate funds for district programs and individual school is the fixed allocation method. Through this approach, usually a fixed percentage often tied to the rate of inflation is allocated to each district program area and individual schools. For example, a building principal may receive a set percentage increase for all grade levels and subject areas for instructional materials and supplies. Through this method, each grade level, subject area, or other building-level program receives a fixed percentage increase.
However, it is common under this approach for the superintendent to allow principals the discretion to adjust the distribution of the overall allocation between line items as deemed necessary. However, the overall amount allocated to the school is fixed at a certain percentage or dollar amount. Also, in instances where enrollment fluctuations occur, special programs are implemented, or unique capital needs exist, additional dollars may be allocated beyond the fixed amount.
Under the zero-based budgeting, funds are allocated based on projected needs rather than prior year’s funding levels. For example, school principals would be required to “make a case” for all budget fund requests. Through this process, they would need to justify program needs before actual budgeted amounts would be established. The concept behind the zero-based budgeting model is that funds should only be allocated based on actual needs, and thereby reduce unnecessary spending.
This approach to budget allocation which emerged in the 1970s was called zero-based budgeting. Although it is less prevalent today, nonetheless, some school districts use this approach or some variance of it to set allocation levels. It is, though, often criticized as too time consuming or unnecessary since allocations are often too small to justify the additional work entailed to implement. The use of a full zero-based budget model is not common; however, it is not usual for school districts to employ elements of the model as part of a fixed allocation process.
In addition to the regular budget accounts, school districts maintain activity fund accounts. These are typically used to manage funds from student-related clubs and activities. However, a school board may choose to include funds from parent and employee groups (Boer, 2004). A common example is a school's Social Fund. Teachers collect dollars from staff members, which are used to purchase gifts for events such as births, weddings, illness, and retirements.
Although these accounts are separate from those of the district, school boards have a fiduciary responsibility under the Illinois School Code, Section 10-20.19(3), to manage all funds properly even though activity fund accounts are not district funds. As such, school boards must establish policies and administrative procedures to meet their fiduciary responsibility. It is important to note that activity funds are audited during the annual school district audit (Boer, 2004).
Even though school boards have the legal responsibility for activity fund accounts, day-to-day management rests with the administration. As a result, administrators must be especially vigilant managing all aspects of the activity fund process. This is especially important since activity fund revenues are often cash-based and handled by parents, teachers, and support personnel (Boer, 2004).
The focus of this chapter was the expenditure side of the equation. After discussing what constitutes a school district budget, we examined Illinois fund accounting requirements. We also studied budget requirements, the state School District Financial Profile system, and common approaches school districts employ to determine program and building-level budget allocations.
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