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Berrien Regional Education Service Agency

Financial Report

with Supplemental Information

June 30, 2013

suggittg

Received


Contents

Independent Auditor's Report 1-3

Management's Discussion and Analysis 4-10

Basic Financial Statements

Government-wide Financial Statements:Statement of Net Position 11Statement of Activities 12

Fund Financial Statements:Governmental Funds:

Balance Sheet 13Reconciliation of the Balance Sheet of Governmental Funds to the

Statement of Net Position 14Statement of Revenue, Expenditures, and Changes in Fund Balances 15Reconciliation of the Statement of Revenue, Expenditures,

and Changes in Fund Balances of Governmental Fundsto the Statement of Activities 16

Proprietary Fund - Internal Service FundStatement of Net Position 17Statement of Revenue, Expenses, and Changes in Net Position 18Statement of Cash Flows 19

Fiduciary Funds -Statement of Net Position 20

Notes to Financial Statements 21-35

Required Supplemental Information 36

Budgetary Comparison Schedule - General Fund 37

Budgetary Comparison Schedule - Special Revenue Fund 38

Other Supplemental Information 39

Nonmajor Governmental Funds:Combining Balance Sheet 40Combining Statement of Revenue, Expenditures, and

Changes in Fund Balances 41

Federal Awards Supplemental Information Issued UnderSeparateCover

Independent Auditor's Report

To the Board of EducationBerrien Regional Education Service Agency

Report on the Financial Statements

We have audited the accompanying financial statements of the governmental activities, eachmajor fund, and the aggregate remaining fund information of Berrien Regional Education ServiceAgency (the "Agency"), as of and for the year ended June 30, 2013 and the related notes to thefinancial statements, which collectively comprise Berrien Regional Education Service Agency'sbasic financial statements as listed in the table of contents.

Management’s Responsibility for the Financial Statements

Management is responsible for the preparation and fair presentation of these financialstatements in accordance with accounting principles generally accepted in the United States ofAmerica; this includes the design, implementation, and maintenance of internal control relevantto the preparation and fair presentation of financial statements that are free from materialmisstatement, whether due to fraud or error.

Auditor’s Responsibility

Our responsibility is to express an opinion on these financial statements based on our audit. Weconducted our audit in accordance with auditing standards generally accepted in the UnitedStates of America and the standards applicable to financial audits contained in GovernmentAuditing Standards, issued by the Comptroller General of the United States. Those standardsrequire that we plan and perform the audit to obtain reasonable assurance about whether thefinancial statements are free from material misstatement.

An audit involves performing procedures to obtain audit evidence about the amounts anddisclosures in the financial statements. The procedures selected depend on the auditor’sjudgment, including the assessment of the risks of material misstatement of the financialstatements, whether due to fraud or error. In making those risk assessments, the auditorconsiders internal control relevant to the entity’s preparation and fair presentation of thefinancial statements in order to design audit procedures that are appropriate in thecircumstances, but not for the purpose of expressing an opinion on the effectiveness of theentity’s internal control. Accordingly, we express no such opinion. An audit also includesevaluating the appropriateness of accounting policies used and the reasonableness of significantaccounting estimates made by management, as well as evaluating the overall presentation of thefinancial statements.

We believe that the audit evidence we have obtained is sufficient and appropriate to provide abasis for our audit opinion.

1

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Praxity

kim.partlo

Benton Harbor


Opinion

In our opinion, the financial statements referred to above present fairly, in all material respects,the respective financial position of the governmental activities, each major fund, and theaggregate remaining fund information of Berrien Regional Education Service Agency as of June30, 2013 and the respective changes in its financial position, and, where applicable, cash flows forthe year then ended, in accordance with accounting principles generally accepted in the UnitedStates of America.

Emphasis of Matter

As described in Note 1 to the financial statements, the Agency adopted the provisions ofGovernmental Accounting Standards Board Statements No. 62, No. 63, and No. 65, as of July 1,2012. Our opinion is not modified with respect to this matter.

Required Supplemental Information

Accounting principles generally accepted in the United States of America require that themanagement's discussion and analysis and the budgetary comparison schedules be presented tosupplement the basic financial statements. Such information, although not a part of the basicfinancial statements, is required by the Governmental Accounting Standards Board, whichconsiders it to be an essential part of financial reporting for placing the basic financial statementsin an appropriate operational, economic, or historical context. We have applied certain limitedprocedures to the required supplemental information in accordance with auditing standardsgenerally accepted in the United States of America, which consisted of inquiries of managementabout the methods of preparing the information and comparing the information for consistencywith management's responses to our inquiries, the basic financial statements, and otherknowledge we obtained during our audit of the basic financial statements. We do not express anopinion or provide any assurance on the information because the limited procedures do notprovide us with sufficient evidence to express an opinion or provide any assurance.

Other Information

Our audit was conducted for the purpose of forming opinions on the financial statements thatcollectively comprise Berrien Regional Education Service Agency's basic financial statements. Theother supplemental information, as identified in the table of contents, is presented for thepurpose of additional analysis and is not a required part of the basic financial statements.

The other supplemental information, as identified in the table of contents, is the responsibility ofmanagement and was derived from and relates directly to the underlying accounting and otherrecords used to prepare the basic financial statements. Such information has been subjected tothe auditing procedures applied in the audit of the basic financial statements and certainadditional procedures, including comparing and reconciling such information directly to theunderlying accounting and other records used to prepare the basic financial statements or to thebasic financial statements themselves, and other additional procedures in accordance withauditing standards generally accepted in the United States of America. In our opinion, the othersupplemental information, as identified in the table of contents, is fairly stated in all materialrespects in relation to the basic financial statements as a whole.

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Other Reporting Required by Government Auditing Standards

In accordance with Government Auditing Standards, we have also issued our report datedSeptember 30, 2013 on our consideration of Berrien Regional Education Service Agency'sinternal control over financial reporting and on our tests of its compliance with certainprovisions of laws, regulations, contracts, grant agreements, and other matters. The purpose ofthat report is to describe the scope of our testing of internal control over financial reporting andcompliance and the results of that testing, and not to provide an opinion on the internal controlover financial reporting or on compliance. That report is an integral part of an audit performedin accordance with Government Auditing Standards in considering Berrien Regional EducationService Agency's internal control over financial reporting and compliance.

September 30, 2013

3


Management’s Discussion and Analysis

4

This section of Berrien Regional Education Service Agency’s (the “Agency”) annual financial

report presents our discussion and analysis of the Agency’s financial performance during the year

ended June 30, 2013. Please read it in conjunction with the Agency’s financial statements, which

immediately follow this section.

Using this Annual Report

This annual report consists of a series of financial statements and notes to those statements.

These statements are organized so the reader can understand Berrien Regional Education

Service Agency financially as a whole. The Agency-wide financial statements provide information

about the activities of the whole Agency, presenting both an aggregate view of the Agency’s

finances and a longer-term view of those finances. The fund financial statements provide the

next level of detail. For governmental activities, these statements tell how services were

financed in the short term as well as what remains for future spending. The fund financial

statements look at the Agency’s operations in more detail than the district-wide financial

statements by providing information about the Agency’s most significant funds - the General

Fund and the Special Education Fund, as well as information on the Agency’s Internal Service

Fund, with all other funds presented in one column as nonmajor funds. The Agency’s Proprietary

Internal Service Fund is reported separately from the governmental funds. The remaining

statement, the statement of fiduciary net position, presents financial information about activities

for which the Agency acts solely as an agent for the benefit of students and parents.

Management’s Discussion and Analysis (MD&A)

(Required Supplemental Information)

Basic Financial Statements

Agency-wide Financial Statements

Proprietary Fund - Internal Service Fund

Fund Financial Statements

Fiduciary Fund

Notes to the Basic Financial Statements

(Required Supplemental Information)

Budgetary Information for Major Funds

Other Supplemental Information


Management’s Discussion and Analysis (Continued)

5

Reporting the Agency as a Whole - Agency-wide Financial Statements

One of the most important questions asked about the Agency is, “As a whole, what is the

Agency’s financial condition as a result of the year’s activities?” The statement of net position

and the statement of activities, which appear first in the Agency’s financial statements, report

information on the Agency as a whole and its activities in a way that helps you answer this

question. We prepare these statements to include all assets and liabilities, using the accrual basis

of accounting, which is similar to the accounting used by most private sector companies. All of

the current year’s revenues and expenses are taken into account regardless of when cash is

received or paid. These two statements report the Agency’s net position - the difference

between assets and liabilities, as reported in the statement of net position - as one way to

measure the Agency’s financial health or financial position. Over time, increases or decreases in

the Agency’s net position - as reported in the statement of activities - are indicators of whether

its financial health is improving or deteriorating. The relationship between revenue and expenses

is the Agency’s operating results. However, the Agency’s goal is to provide services to our

students, not to generate profits as commercial entities do. One must consider many other

nonfinancial factors, such as the quality of the education provided and the safety of the schools,

to assess the overall health of the Agency. The statement of net position and the statement of

activities report the governmental activities for the Agency, which encompass all of the Agency’s

services, including instruction, support services, and food services. Property taxes, unrestricted

State aid (foundation allowance revenue), and State and federal grants finance most of these

activities.

Reporting the Agency’s Most Significant Funds - Fund Financial Statements

The Agency’s fund financial statements provide detailed information about the most significant

funds - not the Agency as a whole. Some funds are required to be established by State law and

by bond covenants. However, the Agency establishes many other funds to help it control and

manage money for particular purposes (the Food Service Fund is an example) or to show that it

is meeting legal responsibilities for using certain taxes, grants, and other money (such as bond-

funded construction funds used for voter-approved capital projects). The governmental funds of

the Agency use the following accounting approach:

Governmental and Proprietary Funds - All of the Agency’s services are reported in

governmental and proprietary funds. Governmental fund reporting focuses on showing how

money flows into and out of funds and the balances left at year end that are available for

spending. They are reported using an accounting method called modified accrual accounting,

which measures cash and all other financial assets that can readily be converted to cash. The

governmental fund statements provide a detailed short-term view of the operations of the

Agency and the services it provides. Governmental fund information helps you determine

whether there are more or fewer financial resources that can be spent in the near future to

finance the Agency’s programs. We describe the relationship (or differences) between

governmental activities (reported in the statement of net position and the statement of activities)

and governmental funds in a reconciliation. The Agency’s Proprietary Internal Service Fund

reports on the full accrual basis and presents the Agency’s self-insurance program for health

benefits.



6

The Agency as Trustee - Reporting the Agency’s Fiduciary Responsibilities

The Agency is the trustee, or fiduciary, for its student activity funds. All of the Agency’s fiduciary

activities are reported in a separate statement of fiduciary net position. We exclude these

activities from the Agency’s other financial statements because the Agency cannot use these

assets to finance its operations. The Agency is responsible for ensuring that the assets reported

in these funds are used for their intended purposes.

The Agency as a Whole

Recall that the statement of net position provides the perspective of the Agency as a whole.

Table 1 provides a summary of the Agency’s net position as of June 30, 2013 and 2012:

TABLE 1

2013 2012

Assets

Current and other assets 14.6$ 17.1$

Capital assets 9.2 9.2

Total assets 23.8 26.3

Liabilities

Current liabilities 5.6 6.0

Long-term liabilities 0.1 0.1

Total liabilities 5.7 6.1

Net Position

Net investment in capital assets 9.2 8.8

Restricted 5.8 8.5

Unrestricted 3.1 2.9

Total net position 18.1$ 20.2$

Governmental Activities

(in millions)

June 30

The above analysis focuses on the net position (see Table 1). The change in net position (see

Table 2) of the Agency’s governmental activities is discussed below. The Agency’s net position

was $18.1 million at June 30, 2013. The net investment in capital assets totaling $9.2 million is

the original cost less depreciation of the Agency’s capital assets. Restricted net position is to be

used for the exclusive purpose of special education and school services, totaling $5.8 million.

The remaining amount of net position ($3.1 million) was unrestricted.



7

The $3.1 million in unrestricted net position of governmental activities represents the

accumulated results of all past years’ operations. The unrestricted net position balance enables

the Agency to meet working capital and cash flow requirements as well as to provide for future

uncertainties. The operating results of the General Fund will have a significant impact on the

change in unrestricted net position from year to year.

The results of this year’s operations for the Agency as a whole are reported in the statement of

activities (Table 2), which shows the changes in net position for the fiscal years ended June 30,

2013 and 2012.

TABLE 2

2013 2012

Revenue

Program revenue:

Charges for services 1.4$ 1.4$

Operating grants and contributions 20.3 20.7

General revenue:

Property taxes 16.9 17.0

State foundation allowance 1.4 1.5

Other 0.6 1.6

Total revenue 40.6 42.2

Functions/Program Expenses

Administration Center 27.4 25.5

Blossomland Learning Center 6.8 6.9

Lighthouse Education Center 4.2 4.3

Juvenile Center 0.5 0.4

Transportation Center 3.2 3.2

Interest on long-term debt 0.1 -

Depreciation (unallocated) 0.5 0.5

Total functions/program expenses 42.7 40.8

(Decrease) Increase in Net Position (2.1) 1.4

Net Position - Beginning of year 20.2 18.8

Net Position - End of year 18.1$ 20.2$

(in millions)


Year Ended June 30

As reported in the statement of activities, the cost of all of our governmental activities this year

was $42.7 million. Certain activities were partially funded from those who benefited from the

programs ($1.4 million) or by other governments and organizations that subsidized certain

programs with grants and contributions ($20.3 million). We paid for the remaining “public

benefit” portion of our governmental activities with $16.9 million in taxes, $1.4 million in State

foundation allowance, and with our other revenue, i.e., interest and general entitlements.



8

The Agency experienced a decrease in net position of $2.1 million. Key reasons for the change

in net position were decreased Medicaid fee-for-service revenue, decreased American Recovery

and Reinvestment Act (ARRA) and EDUjobs revenue, increased excess fund equity expense to

local districts, and adjustments in health insurance contributions.

As discussed above, the net cost shows the financial burden that was placed on the State and the

Agency’s taxpayers by each of these functions. Since property taxes for operations and

unrestricted State aid constitute the vast majority of district operating revenue sources, the

Board of Education and administration must annually evaluate the needs of the Agency and

balance those needs with State-prescribed available unrestricted resources.

The Agency’s Funds

As we noted earlier, the Agency uses funds to help it control and manage money for particular

purposes. Looking at funds helps the reader consider whether the Agency is being accountable

for the resources taxpayers and others provide to it and may provide more insight into the

Agency’s overall financial health.

As the Agency completed this year, the governmental funds reported a combined fund balance

of $8.5 million, which is a decrease of $2.3 million from last year. The primary reasons for the

decrease are as follows:

In the General Fund, our principal operating fund, the fund balance increased compared to the

prior year, showing a net increase of $0.3 million to $2.6 million. This increase was due to

decreased data processing expenditures, increased best practices revenue, and increased

MPSERS rate stabilization revenue.

Our Special Revenue Funds decreased approximately $2.6 million from the prior year to a fund

balance of $5.8 million. This decrease was due to decreased Medicaid fee-for-service revenue,

decreased American Recovery and Reinvestment Act (ARRA) and EDUjobs revenue, increased

excess fund equity expense to local districts, and adjustments in health insurance contributions.

General Fund Budgeting Highlights

Over the course of the year, the Agency revises its budget as it attempts to deal with

unexpected changes in revenue and expenditures. State law requires that the budget be

amended to ensure that expenditures do not exceed appropriations. The final amendment to

the budget was actually adopted just before year end. A schedule showing the Agency’s original

and final budget amounts compared with amounts actually paid and received is provided in

required supplemental information of these financial statements.

There were minor revisions made to the 2012-2013 General Fund original budget. Budgeted

revenue was increased $0.09 million due to increased best practices revenue and increased

MPSERS rate stabilization revenue.

Budgeted expenditures were decreased $0.03 million due to decreased data processing

expenditures.



9

There were no significant variances between the final budget and actual amounts.

Capital Assets and Debt Administration

Capital Assets

As of June 30, 2013, the Agency had $9.2 million invested in a broad range of capital assets,

including land, buildings, furniture, and equipment. This amount represents a net decrease

(including additions, disposals, and depreciation) of approximately $31,000 from last year.

2013 2012

Land 237,753$ 237,753$

Buildings and building improvements 15,157,641 14,702,685

Furniture and equipment 2,112,001 2,112,001

Total capital assets 17,507,395 17,052,439

Less accumulated depreciation (8,352,083) (7,866,184)

Net capital assets 9,155,312$ 9,186,255$

This year’s additions of $454,956 included surveillance equipment, pool HVAC unit, and

fingerprinting devices. No debt was issued for these additions.

Several major capital projects are planned for the 2013-2014 fiscal year. We anticipate capital

additions for 2013-2014 will be approximately $0.5 million, about the same as for the 2012-2013

fiscal year. We present more detailed information about our capital assets in the notes to the

financial statements.

Debt

At the end of this year, the Agency had no bonds outstanding versus $0.4 million in the previous

year. The prior year’s bonds consisted of the following:

2013 2012

Durant Non-Plaintiff bond -$ 383,436$

The other obligations include accrued vacation pay and self-insurance estimated liability. We

present more detailed information about our long-term liabilities in the notes to the financial

statements.



10

Economic Factors and Next Year’s Budgets and Rates

Our elected officials and administration consider many factors when setting the Agency’s fiscal

budget. One of the most important factors affecting the operating budget is state aid and

property tax revenue provided to the Agency. Approximately 51 percent of the total General

Fund revenue is from state sources and approximately 15 percent of total General Fund revenue

is from local property taxes. Under state law, the Agency cannot assess additional property tax

revenue for general operations.

Similarly, approximately 23 percent of total Special Education Fund revenue is from state

sources and approximately 49 percent of total Special Education Fund revenue is from local

property taxes. Subject to voter approval, the Agency could assess additional property tax

revenue for special education operations; however, there is insufficient support from our local

school districts to pursue this.

Since the Agency’s revenue is heavily dependent on state funding and the health of the State’s

School Aid Fund, the actual revenue received depends on the State’s ability to collect revenue to

fund its appropriation to public school districts, intermediate school districts, and regional

education service agencies and how the State determines its funding allocation to each.

While the State’s school districts have been fortunate during this economic downturn to have

access to additional federal funding (i.e., ARRA and Education Jobs), these expired during 2011-

2012 and are not being replaced. It is expected that recent significant increases in retirement

and decreases in insurance expenditures by school districts will have longer-lasting effects that

outlive these stimulus funds. The greater fear for Michigan school districts is Michigan’s history

of reacting to funding shortfalls with one-time fixes that are not data-driven and have no proven

track record of success rather than proactively restructuring the manner in which it funds public

education.


Statement of Net PositionJune 30, 2013

Governmental

Activities

AssetsCash and investments (Note 3) $ 9,700,504Receivables - Net (Note 4) 4,636,110Inventories 15,513Prepaid costs 314,208

Capital assets - Net (Note 5) 9,155,312

Total assets 23,821,647

LiabilitiesAccounts payable 810,599Accrued payroll and other liabilities 3,855,406Unearned revenue (Note 4) 274,674Noncurrent liabilities (Note 7):

Due within one year 599,495

Due in more than one year 143,222

Total liabilities 5,683,396

Net PositionNet investment in capital assets 9,155,312Restricted for special education and school service 5,867,257

Unrestricted 3,115,682

Total net position $ 18,138,251

The Notes to Financial Statements are anIntegral Part of this Statement. 11


Statement of ActivitiesYear Ended June 30, 2013

Program Revenue

Governmental

Activities

Expenses

Charges for

Services

Operating

Grants

Net (Expense)

Revenue and

Changes in Net

Position

Functions/Programs

Primary government - Governmentalactivities:

Administration Center $ 27,420,638 $ 1,045,763 $ 10,896,072 $ (15,478,803)Blossomland Learning Center 6,800,646 14,406 5,944,338 (841,902)Lighthouse Education Center 4,230,223 5,134 2,910,111 (1,314,978)Juvenile Center 492,852 - 588,736 95,884Transportation Center 3,214,856 298,407 - (2,916,449)Interest 89,341 - - (89,341)

Depreciation expense (unallocated) 485,899 - - (485,899)

Total primary government $ 42,734,455 $ 1,363,710 $ 20,339,257 (21,031,488)

General revenue:Property taxes, levied for general purposes 16,903,837State aid not restricted to specific purposes 1,430,762Interest and investment earnings 26,265

Other 600,567

Total general revenue 18,961,431

Change in Net Position (2,070,057)

Net Position - Beginning of year 20,208,308

Net Position - End of year $ 18,138,251



Governmental FundsBalance SheetJune 30, 2013

General Fund

Special

Education

Fund

Nonmajor

Funds

Total

Governmental

Funds

Assets

Cash and investments (Note 3) $ 2,479,996 $ 7,042,834 $ 64,020 $ 9,586,850Receivables (Note 4) 906,476 3,725,878 3,756 4,636,110Inventories 8,704 2,714 4,095 15,513

Prepaid costs and other assets 314,208 - - 314,208

Total assets $ 3,709,384 $10,771,426 $ 71,871 $ 14,552,681

Liabilities, Deferred Inflows of Resources,and Fund Balances

LiabilitiesAccounts payable $ 671,828 $ 120,807 $ 17,964 $ 810,599Other accrued liabilities 59,494 2,220,545 - 2,280,039Due to local school districts - 1,065,239 - 1,065,239Due to other funds 53,600 992,527 - 1,046,127

Unearned revenue (Note 4) 274,674 - - 274,674

Total liabilities 1,059,596 4,399,118 17,964 5,476,678

Deferred Inflows of Resources - Deferredinflow - Unavailable revenue (Note 4) - 558,958 - 558,958

Total liabilities and deferredinflows of resources 1,059,596 4,958,076 17,964 6,035,636

Fund BalancesNonspendable:

Inventories 8,704 2,714 4,095 15,513Prepaid costs 314,208 - - 314,208

Restricted:School service - - 49,812 49,812Special education (Note 10) - 5,810,636 - 5,810,636

Assigned:Administrative Center improvements 89,508 - - 89,508Health and medical 250,000 - - 250,0002013-2014 budgeted operating deficit 254,760 - - 254,760

Unassigned 1,732,608 - - 1,732,608

Total fund balances 2,649,788 5,813,350 53,907 8,517,045

Total liabilities, deferred inflowsof resources, and fundbalances $ 3,709,384 $10,771,426 $ 71,871 $ 14,552,681



Governmental FundsReconciliation of the Balance Sheet of Governmental Funds to the

Statement of Net PositionJune 30, 2013

Fund Balance Reported in Governmental Funds $ 8,517,045

Amounts reported for governmental activities in the statementof net position are different because:

Capital assets used in governmental activities arenot financial resources and are not reportedin the governmental funds:

Cost of capital assets $ 17,507,395

Accumulated depreciation (8,352,083) 9,155,312

Grants and other receivables that are collectedafter year end, such that they are not availableto pay bills outstanding as of year end, are notrecognized in the funds 558,958

Long-term liabilities are not due and payable inthe current period and are not reported inthe governmental funds - Compensatedabsences

(143,222)

Internal Service Fund assets and liabilities areincluded in governmental activities in thestatement of net position 50,158

Net Position of Governmental Activities $ 18,138,251



Governmental FundsStatement of Revenue, Expenditures, and Changes in Fund Balances

Year Ended June 30, 2013

General

Fund

Special

Education

Fund

Other

Nonmajor

Governmental

Funds

Total

Governmental

Funds

RevenueLocal sources $ 2,015,072 $ 17,403,194 $ 80,587 $ 19,498,853State sources 4,250,540 7,391,351 478,090 12,119,981Federal sources 990,991 7,137,190 133,228 8,261,409Interdistrict sources 760,906 298,407 - 1,059,313

Total revenue 8,017,509 32,230,142 691,905 40,939,556

ExpendituresAdministration Center 8,084,040 19,577,646 472,777 28,134,463Blossomland Learning Center - 6,825,300 271,742 7,097,042Lighthouse Education Center - 4,259,004 - 4,259,004Juvenile Center - 492,851 - 492,851Transportation Center - 3,326,155 - 3,326,155

Total expenditures 8,084,040 34,480,956 744,519 43,309,515

Excess of Expenditures Over Revenue (66,531) (2,250,814) (52,614) (2,369,959)

Other Financing Sources (Uses)Transfers in (Note 6) 343,500 - - 343,500Transfers out (Note 6) (11,151) (343,500) - (354,651)

Total other financing sources(uses) 332,349 (343,500) - (11,151)

Net Change in Fund Balances 265,818 (2,594,314) (52,614) (2,381,110)

Fund Balances - Beginning of year 2,383,970 8,407,664 106,521 10,898,155

Fund Balances - End of year $ 2,649,788 $ 5,813,350 $ 53,907 $ 8,517,045



Governmental FundsReconciliation of the Statement of Revenue, Expenditures,

and Changes in Fund Balances of Governmental Fundsto the Statement of Activities

June 30, 2013

Net Change in Fund Balances - Total Governmental Funds $ (2,381,110)

Amounts reported for governmental activities in the statementof activities are different because:

Governmental funds report capital outlays asexpenditures; however, in the statement ofactivities, these costs are allocated over theirestimated useful lives as depreciation:

Depreciation expense $ (485,899)

Capitalized capital outlay 454,956 (30,943)

Revenue is reported in the statement of activitieswhen earned; it is not reported in the fundsuntil collected or collectible within 60 days ofyear end (286,730)

Repayment of bond principal is an expenditure inthe governmental funds, but not in thestatement of activities 383,436

Compensated absences, as well as self-insuredliability claims, are recorded when earned inthe statement of activities. In the currentyear, more was earned than paid out 195,132

Internal Service Funds are included as part ofgovernmental activities 50,158

Change in Net Position of Governmental Activities $ (2,070,057)



Proprietary Fund - Internal Service FundStatement of Net Position

June 30, 2013

Governmental

Activities

Proprietary -

Internal Service

Assets - Current assetsCash and investments $ 113,654

Due from other funds (Note 6) 1,046,127

Total assets 1,159,781

Liabilities - Current liabilitesAccrued liabilities 510,128

Self-insurance estimated liability (Note 8) 599,495

Total liabilities 1,109,623

Net Position - Unrestricted $ 50,158



Proprietary Fund - Internal Service FundStatement of Revenue, Expenses, and Changes in Net Position


Governmental

Activities

Proprietary -

Internal Service

Operating Revenue - Charges to other funds $ 1,501,574

Operating ExpensesHealth benefits - Insurance 89,177Health benefits - Claims 1,345,698

Health benefits - Administration 27,707

Total operating expenses 1,462,582

Operating Income 38,992

Nonoperating Revenue - Interest and investment earnings 15

Income - Before contributions 39,007

Transfer from Other Funds 11,151

Change in Net Position 50,158

Net Position - Beginning of year -

Net Position - End of year $ 50,158



Proprietary Fund - Internal Service FundStatement of Cash Flows


Cash Flows from Operating ActivitiesReceipts from other funds $ 455,447

Payments to vendors (352,959)

Net cash provided by operating activities 102,488

Cash Flows from Noncapital Financing Activities -Transfers from other funds 11,151

Cash Flows from Investment Activities - Interest income 15

Net Increase in Cash and Cash Equivalents 113,654

Cash and Cash Equivalents - Beginning of year -

Cash and Cash Equivalents - End of year $ 113,654

Reconciliation of Operating Income to Net Cash fromOperating Activities

Operating income $ 38,992Adjustments to reconcile operating income to net cash from

operating activities - Changes in assets and liabilities:Due from other funds (1,046,127)

Accrued liabilities and self-insurance estimated liability 1,109,623

Net cash provided by operating activities $ 102,488



Fiduciary FundStatement of Net Position

June 30, 2013

Student

Activities

Agency Fund

Assets - Cash and investments (Note 3) $ 41,114

Liabilities - Due to student groups $ 41,114



Notes to Financial StatementsJune 30, 2013

Note 1 - Summary of Significant Accounting Policies

The accounting policies of Berrien Regional Education Service Agency (the “Agency”)conform to accounting principles generally accepted in the United States of America(GAAP) as applicable to governmental units. The following is a summary of thesignificant accounting policies used by the Agency:

Reporting Entity

The Agency is governed by an elected five-member Board of Education. Theaccompanying financial statements have been prepared in accordance with criteriaestablished by the Governmental Accounting Standards Board for determining thevarious governmental organizations to be included in the reporting entity. These criteriainclude significant operational financial relationships that determine which of thegovernmental organizations are a part of the Agency’s reporting entity, and whichorganizations are legally separate component units of the Agency. Based on theapplication of the criteria, the Agency does not contain any component units.

Agency-wide and Fund Financial Statements

The agency-wide financial statements (i.e., the statement of net position and thestatement of activities) report information on all of the nonfiduciary activities of theprimary government. For the most part, the effect of interfund activity has beenremoved from these statements. Governmental activities, which normally are supportedby taxes and intergovernmental revenue, are reported separately from business-typeactivities, which rely to a significant extent on fees and charges for support. All of theAgency's district-wide activities are considered governmental activities.

The statement of activities demonstrates the degree to which the direct expenses of agiven function or segment are offset by program revenue. Direct expenses are thosethat are clearly identifiable with a specific function. Expenses are presented by activity inthe statement of activities. Program revenue includes (1) charges to customers orapplicants who purchase, use, or directly benefit from goods, services, or privilegesprovided by a given function and (2) grants and contributions that are restricted tomeeting the operational or capital requirements of a particular function. Taxes,intergovernmental payments, and other items not properly included among programrevenue are reported instead as general revenue.

Separate financial statements are provided for governmental funds, proprietary funds,and fiduciary funds, even though the latter are excluded from the district-wide financialstatements. Major individual governmental funds are reported as separate columns inthe fund financial statements.

21



Note 1 - Summary of Significant Accounting Policies (Continued)

Measurement Focus, Basis of Accounting, and Financial StatementPresentation

District-wide Financial Statements - The district-wide financial statements arereported using the economic resources measurement focus and the accrual basis ofaccounting. Revenue is recorded when earned and expenses are recorded when aliability is incurred, regardless of the timing of related cash flows. Property taxes arerecognized as revenue in the year for which they are levied. Grants, categorical aid, andsimilar items are recognized as revenue as soon as all eligibility requirements imposed bythe provider have been met.

As a general rule, the effect of interfund activity has been eliminated from the district-wide financial statements. Exceptions to this general rule are charges between business-type and governmental activities where eliminations of these charges would distort thedirect costs and program revenue restricted for the various functions concerned.

When an expense is incurred for purposes for which restricted and unrestricted netposition or fund balance are available, the Agency's policy to first apply restrictedresources. When an expense is incurred for purposes which amounts in any of theunrestricted fund balance classified could be used, it is the Agency's policy to spendfunds in this order: committed, assigned, and unassigned.

Amounts reported as program revenue include (1) charges to customers or applicantsfor goods, services, or privileges provided, (2) operating grants and contributions, and(3) capital grants and contributions. Internally dedicated resources are reported asgeneral revenue rather than as program revenue. Likewise, general revenue includes alltaxes and unrestricted state aid.

Fund Financial Statements - Governmental fund financial statements are reportedusing the current financial resources measurement focus and the modified accrual basisof accounting. Revenue is recognized as soon as it is both measurable and available.Revenue is considered to be available if it is collected within the current period or soonenough thereafter to pay liabilities of the current period. Revenue not meeting thisdefinition is classified as a deferred inflow of resources. For this purpose, the Agencyconsiders revenue to be available if it is collected within 60 days of the end of thecurrent fiscal period. Expenditures generally are recorded when a liability is incurred, asunder accrual accounting. However, debt service expenditures, as well as expendituresrelated to compensated absences and claims and judgments, are recorded only whenpayment is due.

Property taxes, unrestricted state aid, intergovernmental grants, and interest associatedwith the current fiscal period are all considered to be susceptible to accrual and so havebeen recognized as revenue of the current fiscal period. All other revenue items areconsidered to be available only when cash is received by the Agency.

22




Proprietary fund and fiduciary fund statements are also reported using the economicresources measurement focus and the accrual basis of accounting. Proprietary fundsdistinguish operating revenue and expenses from nonoperating items. Operatingrevenue and expenses generally result from providing services and producing anddelivering goods in connection with a proprietary fund's principal ongoing operations. Allrevenue and expenses not meeting this definition are reported as nonoperating revenueand expenses. Expenses are presented by activity in the statement of revenue,expenditures, and changes in fund balances.

The Agency reports the following major governmental funds:

General Fund - The General Fund is the Agency’s primary operating fund. It accountsfor all financial resources of the Agency, except those required to be accounted for inanother fund.

Special Education Fund - The Special Education Fund, a Special Revenue Fund, is usedto account for all financial resources relating to the operation of special educationprograms of the Agency.

Additionally, the Agency reports the following fund types:

Special Revenue Funds - Special Revenue Funds are used to account for the proceedsof specific revenue sources that are restricted to expenditure for specified purposes.

School Service Fund - The School Service Fund is used to segregate, foradministrative purposes, the transactions of a particular activity from regular revenueand expenditure accounts. The Agency maintains full control of this fund. The School

Service Fund maintained by the Agency is for food services. Food services areprovided to the special education programs. Any operating deficit generated by thisactivity is the responsibility of the General Fund.

Internal Service Fund - The Internal Service Fund was created as of June 1, 2013 toaccount for the Agency's self-insured health benefits. Costs are charged to the otherfunds on a cost-reimbursement basis.

Debt Retirement Fund - The Debt Retirement Fund is used to record the payment ofinterest, principal, and other expenditures on long-term debt.

Fiduciary Funds - Fiduciary Funds are used to account for assets held by the Agency ina trustee capacity or as an agent. Agency Funds are custodial in nature (assets equalliabilities) and do not involve the measurement of results of operations.

Activities (Agency) Fund - The Agency presently maintains an Activities Fund torecord the transactions of student groups for school and school-related purposes. Thefunds are segregated and held in trust for the students.

23




Assets, Liabilities, and Net Assets or Equity

Cash and Investments - Cash and investments include cash on hand, demand deposits,and short-term investments with a maturity of three months or less when acquired.Investments are stated at fair value. Pooled investment income from the General Fundand Special Education Fund is generally allocated to each fund using a weighted averageof balance for the principal.

Receivables and Payables - In general, outstanding balances between funds arereported as “due to/from other funds.” Activities between funds that are representativeof lending/borrowing arrangements outstanding at the end of the fiscal year are referredto as “advances to/from other funds.”

All trade and property tax receivables are shown net of an allowance for uncollectibleamounts. The Agency considers all receivables to be fully collectible; accordingly, noallowance for uncollectible amounts is recorded. Property taxes are assessed as ofDecember 31 and the related property taxes become a lien on December 1 of thefollowing year. These taxes are due on February 14 with the final collection date ofFebruary 28 before they are added to the county tax rolls.

Inventories and Prepaid Costs - Inventories are valued at cost, on a first-in, first-outbasis. Inventories of governmental funds are recorded as expenditures when consumed.United States Department of Agriculture Commodities inventory received by the SchoolService Fund is recorded as inventory and deferred revenue until used.

Certain payments to vendors reflect costs applicable to future fiscal years and arerecorded as prepaid costs in both district-wide and fund financial statements.

Capital Assets - Capital assets, which include land, buildings, equipment, and vehicles,are reported in the governmental column in the district-wide financial statements.Capital assets are defined by the Agency as assets with an initial individual cost of morethan $5,000 and an estimated useful life in excess of five years. Such assets are recordedat historical cost or estimated historical cost if purchased or constructed. Donatedcapital assets are recorded at estimated fair market value at the date of donation. Costsof normal repair and maintenance that do not add to the value or materially extend assetlife are not capitalized. The Agency does not have infrastructure-type assets.

Buildings, equipment, and vehicles are depreciated using the straight-line method overthe following useful lives:

Buildings and building additions 15 to 50 yearsFurniture and other equipment 5 to 10 years

24




Compensated Absences - The liability for compensated absences reported in thedistrict-wide statements consists of earned but unused accumulated vacation pay. Aliability for this amount is reported in governmental funds as it comes due for payment.The liability has been calculated using the vesting method, in which leave amounts forboth employees who are currently eligible to receive termination payments at normalretirement age and other employees who are expected to become eligible in the futureto receive such payments upon normal retirement are included.

Long-term Obligations - In the district-wide financial statements, long-term debt andother long-term obligations are reported as liabilities in the statement of net position.

Fund Balance - Fund balance classifications comprise a hierarchy based primarily onthe extent to which a government is bound to observe constraints imposed on the useof the resources reported in governmental funds. Under this standard, the fund balanceclassifications are comprised of the following - nonspendable, restricted, committed,assigned, and unassigned.

In the fund financial statements, governmental funds report the following components offund balance:

Nonspendable: Amounts that are not in spendable form or are legally or contractuallyrequired to be maintained intact

Restricted: Amounts that are legally restricted by outside parties, constitutionalprovisions, or enabling legislation for use for a specific purpose

Committed: Amounts that have been formally set aside by the Board of Education foruse for specific purposes. Commitments are made and can be rescinded only viaresolution of the Board of Education.

Assigned: Intent to spend resources on specific purposes expressed by the Board ofEducation or superintendent, who is authorized by a policy approved by the Board ofEducation, to make assignments.

Unassigned: Amounts that do not fall into any other category above. This is theresidual classification for amounts in the General Fund and represents fund balancethat has not been assigned to other funds and has not been restricted, committed, orassigned to specific purposes in the General Fund. In other governmental funds, onlynegative unassigned amounts are reported, if any, and represent expendituresincurred for specific purposes exceeding the amounts previously restricted,committed, or assigned to those purposes.

Comparative Data - Comparative data is not included in the Agency’s financialstatements.

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Accounting Change - Effective July 1, 2012, the Agency implemented the provisions ofGovernmental Accounting Standards Board No. 62, Codification of Accounting andFinancial Reporting Guidance Contained in Pre-November 30, 1989 FASB and AICPAPronouncements. This statement incorporates into GASB literature certain accountingand financial reporting guidance issued on or before November 30, 1989 that is includedin FASB statements and interpretations, APB opinions, and accounting research bulletinsof the AICPA Committee on Accounting Procedure. This statement did not have asignificant impact on the Agency's financial statements.

Effective July 1, 2012, the Agency implemented the provisions of GovernmentalAccounting Standards Board Statement No. 63, Financial Reporting of Deferred Outflowsof Resources, Deferred Inflows of Resources, and Net Position. This statement incorporatesdeferred outflows of resources and deferred inflows of resources, as defined by GASBConcepts Statement No. 4, into the definitions of the required components of theresidual measure of net position, formerly net assets. This statement also provided anew statement of net position format to report all assets, deferred outflows ofresources, liabilities, deferred inflows of resources, and net position. This statementimpacted the format and report of the balance sheet at the government-wide level andalso at the fund level.

Also effective July 1, 2012, the Agency implemented the provisions of GovernmentalAccounting Standards Board Statement No. 65, Items Previously Reported as Assets andLiabilities. This statement establishes accounting and financial reporting standards thatreclassify, as deferred outflows and inflows of resources, certain items that werepreviously reported as assets and liabilities. This statement also provides other financialreporting guidance related to the impact of the financial statement elements deferredoutflows of resources and deferred inflows of resources.

Note 2 - Stewardship, Compliance, and Accountability

Budgetary Information - Annual budgets are adopted on a basis consistent withgenerally accepted accounting principles and state law for the General Fund and allSpecial Revenue Funds. All annual appropriations lapse at fiscal year end.

The budget document presents information by program. The legal level of budgetarycontrol adopted by the governing body (i.e., the level at which expenditures may notlegally exceed appropriations) is the program level. State law requires the Agency tohave its budget in place by July 1. Expenditures in excess of amounts budgeted are aviolation of Michigan law. State law permits districts to amend their budgets during theyear. During the year, the budget was amended in a legally permissible manner.

Unexpended appropriations lapse at year end; encumbrances are not included asexpenditures. The amount of encumbrances outstanding at June 30, 2013 is not known.

26



Note 2 - Stewardship, Compliance, and Accountability (Continued)

Excess of Expenditures Over Appropriations in Budgeted Funds - The Agency didnot have significant expenditure budget variances.

Fund Deficits - Under Michigan Law, school districts are required to maintain positivefund balance in each fund. The Agency has no accumulated fund balance/retainedearnings deficits in any fund.

Note 3 - Deposits and Investments

State statutes and the Agency’s investment policy authorize the Agency to makedeposits in the accounts of federally insured banks, credit unions, and savings and loanassociations that have offices in Michigan. The Agency is allowed to invest in U.S.Treasury or agency obligations, U.S. government repurchase agreements, bankers’acceptances, commercial paper rated prime at the time of purchase that matures notmore than 270 days after the date of purchase, mutual funds, and investment pools thatare composed of authorized investment vehicles. The Agency’s deposits are inaccordance with statutory authority.

The Agency has designated two financial institutions for the deposit of its funds.

The investment policy adopted by the board in accordance with state statutes hasauthorized investment as listed above.

The Agency’s cash and investments are subject to several types of risk, which areexamined in more detail below:

Custodial Credit Risk of Bank Deposits - Custodial credit risk is the risk that in theevent of a bank failure, the Agency’s deposits may not be returned to it. The Agency’sinvestment policy requires that financial institutions be evaluated and only those with anacceptable risk level be used for the Agency’s deposits for custodial credit risk. At yearend, the Agency's deposit balance of $9,404,057 had $8,904,057 of bank deposits(checking and savings accounts) that were uninsured and uncollateralized. The Agencybelieves that due to the dollar amounts of cash deposits and the limits of FDICinsurance, it is impractical to insure all deposits. As a result, the Agency evaluates eachfinancial institution with which it deposits funds and assesses the level of risk of eachinstitution; only those institutions with an acceptable estimated risk level are used asdepositories.

Custodial Credit Risk of Investments - Custodial credit risk is the risk that, in theevent of the failure of the counterparty, the Agency will not be able to recover the valueof its investments or collateral securities that are in the possession of an outside party.The Agency’s policy for custodial credit risk states that risk will be minimized bydiversifying the investment portfolio, so that the impact of potential losses from any onetype of security or issuer will be minimized. The Agency does not have investments withcustodial credit risk.

27



Note 3 - Deposits and Investments (Continued)

Interest Rate Risk - Interest rate risk is the risk that the value of investments willdecrease as a result of a rise in interest rates. The Agency’s investment policy does notrestrict investment maturities, other than commercial paper which can only bepurchased with a 270-day maturity. The Agency’s policy minimizes interest rate risk byrequiring the structuring of the investment portfolio so that securities mature to meetcash requirements for ongoing operations, thereby avoiding the need to sell securities inthe open market, and investing operating funds primarily in shorter-term securities,liquid asset funds, money market mutual funds, or similar investment pools and limitingthe average maturity in accordance with the Agency’s cash requirements.

Credit Risk - State law limits investments in commercial paper to the top two ratingsissued by nationally recognized statistical rating organizations. The Agency’s investmentpolicy does not further limit its investment choices.

At year end, the maturities of investments and the credit quality ratings of debtsecurities (other than the U.S. government) are as follows:

Investment Fair Value Maturities Rating

Rating

Organization

Michigan Liquid Asset Fund $ 566,227 Various AAAm S&P

Concentration of Credit Risk - The Agency places no limit on the amount the Agencymay invest in any one issuer. The Agency’s policy minimizes concentration of credit riskby requiring diversification of the investment portfolio so that the impact of potentiallosses from any one type of security or issuer will be minimized. All of the Agency'sinvestments are in the Michigan Liquid Asset Fund.

Foreign Currency Risk - Foreign currency risk is the risk that an investmentdenominated in the currency of a foreign country could reduce its U.S. dollar value as aresult of changes in foreign currency exchange rates. State law and the Agency’s policyprohibit investment in foreign currency.

28



Note 4 - Receivables and Unavailable/Unearned Revenue

Receivables as of year end for the Agency’s individual major funds and the nonmajorfunds are as follows:

General

Fund

Special

Education

Fund

Other

Nonmajor

Governmental

Funds Total

Receivables:Accounts $ 115,102 $ 935,686 $ 221 $ 1,051,009Intergovernmental 791,374 2,790,192 3,535 3,585,101

Net receivables $ 906,476 $ 3,725,878 $ 3,756 $ 4,636,110

Governmental funds report unavailable revenue in connection with receivables forrevenue that is not considered to be available to liquidate liabilities of the currentperiod. Governmental funds also report unearned revenue recognition in connectionwith resources that have been received but not yet earned. At the end of the currentfiscal year, the various components of unearned and unavailable revenue are as follows:

Governmental Funds

Deferred

Inflow -

Unavailable

Liability -

Unearned

Transportation services provided to the local districts $ 558,958 $ -

Grant and categorical aid payment - 274,674

Total$ 558,958 $ 274,674

29



Note 5 - Capital Assets

Capital asset activity of the Agency’s governmental activities was as follows:

Balance July 1, 2012 Additions

Disposals and

AdjustmentsBalance

June 30, 2013


Capital assets not being depreciated -Land $ 237,753 $ - $ - $ 237,753

Capital assets being depreciated:Facility - Administration Center 4,294,987 18,475 - 4,313,462Facility - Blossomland Learning Center 4,580,233 296,398 - 4,876,631Facility - Lighthouse Education Center 3,970,187 28,784 - 3,998,971Facility - Building Trades Center 402,422 - - 402,422Facility - Transportation Center 1,454,856 111,299 - 1,566,155Furniture and equipment 2,112,001 - - 2,112,001

Subtotal 16,814,686 454,956 - 17,269,642

Accumulated depreciation:Facility - Administration Center 2,056,297 153,713 - 2,210,010Facility - Blossomland Learning Center 2,842,638 130,022 - 2,972,660Facility - Lighthouse Education Center 714,221 85,988 - 800,209Facility - Building Trades Center 72,434 8,049 - 80,483Facility - Transportation Center 345,460 34,560 - 380,020Furniture and equipment 1,835,134 73,567 - 1,908,701

Subtotal 7,866,184 485,899 - 8,352,083

Net capital assets being depreciated 8,948,502 (30,943) - 8,917,559

Net capital assets $ 9,186,255 $ (30,943) $ - $ 9,155,312

Depreciation expense was not charged to activities as the Agency considers its assets toimpact multiple activities and allocation is not practical.

Note 6 - Interfund Receivables, Payables, and Transfers

The composition of interfund balances is as follows:

Fund Due From

Fund Due To General Fund

Special

Education Fund Total

Internal Service Fund $ 53,600 $ 992,527 $ 1,046,127

The interfund receivables from the General Fund and the Special Education Fund relateto services provided by the Internal Service Fund.

30



Note 6 - Interfund Receivables, Payables, and Transfers (Continued)

Interfund transfers reported in the fund financial statements are comprised of thefollowing:

Transfers In

Transfers Out -

Special

Education Fund

Transfers Out -

General Fund

General Fund $ 343,500 $ -

Internal Service Fund - 11,151

Total $ 343,500 $ 11,151

The transfer to the General Fund was a payment for services provided. The transfer tothe Internal Service Fund was to start the fund.

Note 7 - Long-term Debt

The Agency issues bonds and other contractual commitments to provide for theacquisition and construction of major capital facilities and the acquisition of certainequipment. General obligation bonds are direct obligations and pledge the full faith andcredit of the Agency. Other long-term obligations include compensated absences andself-insurance estimated liability.

Long-term debt activity can be summarized as follows:

BeginningBalance Additions Reductions

EndingBalance

Due WithinOne Year


Durant Non-Plaintiff Bond $ 383,436 $ - $ 383,436 $ - $ -Compensated absences 138,927 4,295 - 143,222 -Self-insurance estimated liability 199,427 400,068 - 599,495 599,495

Total governmentalactivities $ 721,790 $ 404,363 $ 383,436 $ 742,717 $ 599,495


Durant Non-Plaintiff Bond - Included in governmental activities general obligationbonds is the Durant Non-Plaintiff Bond. Annual total payments (principal and interest)associated with this bond are funded by the State of Michigan via specificallyappropriated state aid and will not require any Agency debt levy or utilization of anyother Agency financial resources. During the year ended June 30, 2007, the State ofMichigan revised the payment schedule of the obligation. The total obligation was notchanged. The Durant Non-Plaintiff Bond was paid off during the year ended June 30,2013.

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Note 8 - Risk Management

The Agency is exposed to various risks of loss related to property loss, torts, errors andomissions, and employee injuries (workers’ compensation), as well as medical benefits,dental, and optical provided to employees. The Agency has purchased commercialinsurance for general liability, property/casualty, and error and omissions claims andparticipates in the SET-SEG (risk pool) for claims relating to workers' compensation.The Agency is uninsured for medical claims up to $100,000 individually and $4,868,809aggregately.

The Agency estimates the liability for claims that have been incurred through the end ofthe fiscal year, including both those claims that have been reported as well as those thathave not yet been reported. These estimates are recorded in the district-widestatements and in the Internal Service Fund beginning in the fiscal year ended June 30,2013. Changes in the estimated liability for the past two fiscal years were as follows:

2013 2012

Estimated liability - Beginning of year $ 416,318 $ 280,745Estimated claims incurred - Including changes in

estimates 3,883,784 4,310,619

Claim payments (3,700,607) (4,175,046)

Estimated liability - End of year $ 599,495 $ 416,318

Note 9 - Defined Benefit Pension Plan and Postemployment Benefits

Plan Description - The Agency participates in the Michigan Public School Employees’Retirement System (MPSERS), a statewide, cost-sharing, multiple-employer definedbenefit public employee retirement system governed by the State of Michigan thatcovers substantially all employees of the Agency. The system provides retirement,survivor, and disability benefits to plan members and their beneficiaries. The systemalso provides postemployment health care benefits to retirees and beneficiaries whoelect to receive those benefits.

The Michigan Public School Employees’ Retirement System issues a publicly availablefinancial report that includes financial statements and required supplemental informationfor the pension and postemployment health care plans. That report is available on theweb at http://www.michigan.gov/orsschools, or by writing to the Office of RetirementSystem at 7150 Harris Drive, P.O. Box 30171, Lansing, MI 48909.

32



Note 9 - Defined Benefit Pension Plan and Postemployment Benefits(Continued)

Pension Benefits - Employer contributions to the pension system result from theimplementing effects of the School Finance Reform Act. Under these procedures, eachschool district is required to contribute the full actuarial funding contribution amount tofund pension benefits. The employer contribution rate for basic plan members was15.96 percent of covered payroll for the period from July 1, 2012 through September30, 2012. The employer contribution rate for pension plus plan members was 14.73percent for the period from July 1, 2012 through September 30, 2012. BeginningOctober 1, 2012 through January 31, 2013, employees were given the following planoptions with the corresponding employer contribution rates:

First Worked

Before July 1,

2010*

First Worked on

or After July 1,

2010 Through

September 3,

2012**

First Worked on or

After September 4,

2012 and Remain

Pension Plus

First Worked on

or After

September 4,

2012 and

Elect DC

Pension contributions %16.25 %15.02 %15.02 %12.78Health contributions %9.11 %9.11 %8.18 %8.18

* Basic, MIP Fixed, MIP Graded, MIP Plus** Pension Plus

For the period from February 1, 2013 through June 30, 2013, employees couldtransition to a defined contribution plan (DC), and could also elect out of the healthcarepremium subsidy and into the Personal Healthcare Fund (PHF), depending upon theirdate of hire and retirement plan election. Employees had the following plan optionswith the corresponding employer contribution rates:

Basic MIP

Pension

Plus

Pension

Plus PHF*

Pension

Plus to

DC with

PHF*

Basic MIP

DB to

DC with

DB

Health

Basic MIP

DB to

DC with

PHF

Basic MIP

with PHF

Pension contributions %15.21 %15.02 %15.02 %12.78 %12.78 %12.78 %15.21Health contributions %9.11 %9.11 %8.18 %8.18 %9.11 %8.18 %8.18Defined contribution plan

employer contributions:DC employer

contributions %0.00 %1.00 %1.00 %3.00 %4.00 %4.00 %0.00Personal Healthcare

Fund %0.00 %0.00 %2.00 %2.00 %0.00 %2.00 %2.00

* First worked September 4, 2012 or later

33



Note 9 - Defined Benefit Pension Plan and Postemployment Benefits(Continued)

Depending on the plan selected, plan member contributions range from 0 percent up to7.0 percent of gross wages. Plan members electing into the defined contribution planare not required to make additional contributions.

The Agency’s required and actual contributions to the plan for the years ended June 30,2013, 2012, and 2011 were $2,103,408, $1,819,138, and $1,455,510, respectively.

Postemployment Benefits - Under the MPSERS act, all retirees participating in theMPSERS pension plan have the option of continuing health, dental, and vision coveragethrough MPSERS. Retirees electing this coverage contribute an amount equivalent tothe monthly cost for Part B Medicare and 10 percent of the monthly premium amountfor the health, dental, and vision coverage at the time of receiving the benefits. TheMPSERS board of trustees annually sets the employer contribution rate to fund thebenefits on a pay-as-you-go basis. Participating employers are required to contribute atthat rate. The employer contribution rate was 8.5 percent of covered payroll for theperiod from July 1, 2012 through September 30, 2012. For the period from October 1,2012 through June 30, 2013, the employer contribution rate ranged from 8.18 percentto 9.11 percent dependent upon the employee’s date of hire and plan election as notedabove. Effective February 1, 2013, members can choose to contribute 3 percent oftheir covered payroll to the Retiree Healthcare Fund and keep this premium subsidybenefit, or they can elect not to pay the 3 percent contribution and instead choose thePersonal Healthcare Fund, which can be used to pay healthcare expenses in retirement.Members electing the Personal Healthcare Fund will be automatically enrolled in a2 percent employee contribution into their 457 account as of their transition date andcreate a 2 percent employer match into the employee’s 401(k) account.

The Agency’s required and actual contributions to the plan for retiree health carebenefits for the years ended June 30, 2013, 2012, and 2011 were $1,262,044,$1,038,830, and $936,899, respectively.

Note 10 - Restricted Fund Balance

The Special Education Fund fund balance is restricted. Identified uses of the fund balanceat June 30, 2013 include:

Administration Center improvements $ 268,522Blossomland improvements 111,700Health and medical 750,000Special education - General 3,614,270

2013-2014 budgeted operating deficit 1,066,144

Total $ 5,810,636

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Note 11 - Upcoming Accounting Pronouncements

In June 2012, the GASB issued GASB Statement No. 68, Accounting and FinancialReporting for Pensions. Statement No. 68 requires governments providing defined benefitpensions to recognize their unfunded pension benefit obligation as a liability for the firsttime, and to more comprehensively and comparably measure the annual costs ofpension benefits. This net pension liability that will be recorded on the government-wide, proprietary, and discretely presented component units statements will becomputed differently than the current unfunded actuarial accrued liability, using specificparameters set forth by the GASB. The statement also enhances accountability andtransparency through revised note disclosures and required supplemental information(RSI). The Agency is currently evaluating the impact this standard will have on thefinancial statements when adopted. The provisions of this statement are effective forfinancial statements for the year ending June 30, 2015.

35

Required Supplemental Information

36


Required Supplemental InformationBudgetary Comparison Schedule - General Fund


Original

Budget

Final

Budget Actual

Over (Under)

Final Budget

RevenueLocal sources $ 2,190,169 $ 2,019,623 $ 2,015,072 $ (4,551)State sources 4,237,716 4,293,670 4,250,540 (43,130)Federal sources 545,925 1,025,744 990,991 (34,753)Interdistrict sources 1,031,020 758,684 760,906 2,222

Total revenue 8,004,830 8,097,721 8,017,509 (80,212)

Expenditures - Administration Center 8,245,241 8,212,449 8,084,040 (128,409)

Excess of Expenditures Over Revenue (240,411) (114,728) (66,531) 48,197

Other Financing Sources (Uses)Transfers in 343,500 343,500 343,500 -

Transfers out - - (11,151) (11,151)

Net Change in Fund Balance 103,089 228,772 265,818 37,046

Fund Balance - Beginning of year 2,383,970 2,383,970 2,383,970 -

Fund Balance - End of year $ 2,487,059 $ 2,612,742 $ 2,649,788 $ 37,046

37


Required Supplemental InformationBudgetary Comparison Schedule - Special Revenue Fund


Original

Budget

Final

Budget Actual

Over (Under)

Final Budget

RevenueLocal sources $ 17,957,256 $ 17,505,902 $ 17,403,194 $ (102,708)State sources 6,545,201 7,390,812 7,391,351 539Federal sources 6,996,860 7,251,508 7,137,190 (114,318)Interdistrict sources 299,739 298,359 298,407 48

Total revenue 31,799,056 32,446,581 32,230,142 (216,439)

ExpendituresAdministration Center 16,613,338 20,020,871 19,577,646 (443,225)Blossomland Learning Center 6,833,459 6,872,524 6,825,300 (47,224)Lighthouse Education Center 4,607,317 4,287,278 4,259,004 (28,274)Juvenile Center 393,829 528,027 492,851 (35,176)Transportation Center 3,492,300 3,446,306 3,326,155 (120,151)

Total expenditures 31,940,243 35,155,006 34,480,956 (674,050)

Excess of Expenditures Over Revenue (141,187) (2,708,425) (2,250,814) 457,611

Other Financing Uses - Transfers out (343,500) (343,500) (343,500) -

Net Change in Fund Balance (484,687) (3,051,925) (2,594,314) 457,611

Fund Balance - Beginning of year 8,407,664 8,407,664 8,407,664 -

Fund Balance - End of year $ 7,922,977 $ 5,355,739 $ 5,813,350 $ 457,611

38

Other Supplemental Information

39


Other Supplemental InformationCombining Balance Sheet

Nonmajor Governmental FundsJune 30, 2013

Special

Revenue

Fund

School

Service

Debt

Retirement

Fund

Total

Nonmajor

Governmental

Funds

Assets

Cash and investments $ 64,020 $ - $ 64,020Accounts receivable 3,756 - 3,756Inventories 4,095 - 4,095

Total assets $ 71,871 $ - $ 71,871

Liabilities and Fund Balances

Liabilities - Accounts payable$ 17,964 $ - $ 17,964

Fund BalancesNonspendable - Inventories 4,095 - 4,095

Restricted 49,812 - 49,812

Total fund balances 53,907 - 53,907

Total liabilities and fund balances $ 71,871 $ - $ 71,871

40


Other Supplemental InformationCombining Statement of Revenue, Expenditures, and

Changes in Fund BalancesNonmajor Governmental Funds


Special

Revenue

Fund

School

Service

Debt

Retirement

Fund

Total

Nonmajor

Governmental

Funds

RevenueLocal $ 80,587 $ - $ 80,587State 5,313 472,777 478,090

Federal 133,228 - 133,228

Total revenue 219,128 472,777 691,905

ExpendituresAdministration Center - 472,777 472,777

Blossomland Learning Center 271,742 - 271,742

Total expenditures 271,742 472,777 744,519

Net Change in Fund Balances (52,614) - (52,614)

Fund Balances - Beginning of year 106,521 - 106,521

Fund Balances - End of year $ 53,907 $ - $ 53,907

41


Federal Awards

Supplemental Information

June 30, 2013

suggittg

Received


Contents

Independent Auditor's Report1

Report on Internal Control Over Financial Reporting and on Compliance and OtherMatters Based on an Audit of Financial Statements Performed in Accordancewith Government Auditing Standards 2-3

Report on Compliance with Requirements That Could Have a Direct and MaterialEffect Each Major Program and on Internal Control Over Compliance inAccordance with OMB Circular A-133 4-5

Schedule of Expenditures of Federal Awards 6-9

Schedule of Expenditures of Federal Awards Provided to Subrecipients 10-11

Notes to Schedule of Expenditures of Federal Awards 12

Schedule of Findings and Questioned Costs 13-14



We have audited the financial statements of the governmental activities, each major fund, andthe aggregate remaining fund information of the Berrien Regional Education Service Agency (the"Agency") as of and for the year ended June 30, 2013, which collectively comprise the Agency'sbasic financial statements, and have issued our report thereon dated September 30, 2013. Thesebasic financial statements are the responsibility of the Agency's management. Our responsibilityis to express opinions on these basic financial statements based on our audit.

We conducted our audit in accordance with auditing standards generally accepted in the UnitedStates of America and the standards applicable to financial audits contained in GovernmentAuditing Standards, issued by the Comptroller General of the United States. Those standardsrequire that we plan and perform the audit to obtain reasonable assurance about whether thebasic financial statements are free of material misstatement. An audit includes examining, on atest basis, evidence supporting the amounts and disclosures in the financial statements. An auditalso includes assessing the accounting principles used and significant estimates made bymanagement, as well as evaluating the overall financial statement presentation. We believe thatour audit provides a reasonable basis for our opinions.

Our audit was conducted for the purpose of forming opinions on the financial statements thatcollectively comprise the Berrien Regional Education Service Agency’s basic financial statements.The accompanying schedule of expenditures of federal awards and schedule of expenditures offederal awards provided to subrecipients are presented for the purpose of additional analysisand are not a required part of the basic financial statements. The information in these scheduleshas been subjected to the auditing procedures applied in the audit of the basic financialstatements and, in our opinion, is fairly stated in all material respects in relation to the basicfinancial statements taken as a whole.

September 30, 2013

1

amanda.omalley

St Joe

amanda.omalley

Praxity

Report on Internal Control Over Financial Reporting and on Complianceand Other Matters Based on an Audit of Financial Statements Performed in Accordance with Government Auditing Standards


To the Management and the Board of EducationBerrien Regional Education Service Agency

We have audited the financial statements of the governmental activities, each major fund, andthe aggregate remaining fund information of the Berrien Regional Education Service Agency (the"Agency") as of and for the year ended June 30, 2013, which collectively comprise the Agency'sbasic financial statements, and have issued our report thereon dated September 30, 2013. Wehave conducted our audit in accordance with auditing standards generally accepted in the UnitedStates of America and the standards applicable to financial audits contained in GovernmentAuditing Standards, issued by the Comptroller General of the United States.

Internal Control Over Financial Reporting

In planning and performing our audit, we considered the Berrien Regional Education ServiceAgency's internal control over financial reporting as a basis for designing our auditing proceduresfor the purpose of expressing our opinions on the financial statements, but not for the purposeof expressing an opinion on the effectiveness of the entity's internal control over financialreporting. Accordingly, we do not express an opinion on the effectiveness of the entity's internalcontrol over financial reporting.

A deficiency in internal control exists when the design or operation of a control does not allowmanagement or employees, in the normal course of performing their assigned functions, toprevent or detect and correct misstatements on a timely basis. A material weakness is adeficiency, or combination of deficiencies, in internal control, such that there is a reasonablepossibility that a material misstatement of the entity's financial statements will not be prevented,or detected and corrected on a timely basis.

Our consideration of internal control over financial reporting was for the limited purposedescribed in the first paragraph of this section and was not designed to identify all deficiencies ininternal control over financial reporting that might be deficiencies, significant deficiencies, ormaterial weaknesses. We did not identify any deficiencies in internal control over financialreporting that we consider to be material weaknesses, as defined above.

2

amanda.omalley

St Joe

amanda.omalley

Praxity

To the Management and the Board of EducationBerrien Regional Education Service Agency

Compliance and Other Matters

As part of obtaining reasonable assurance about whether the Berrien Regional Education ServiceAgency's financial statements are free of material misstatement, we performed tests of itscompliance with certain provisions of laws, regulations, contracts, and grant agreements,noncompliance with which could have a direct and material effect on the determination offinancial statement amounts. However, providing an opinion on compliance with thoseprovisions was not an objective of our audit and, accordingly, we do not express such anopinion. The results of our tests disclosed no instances of noncompliance or other matters thatare required to be reported under Government Auditing Standards.

The purpose of this report is solely to describe the scope of our testing of internal control andcompliance and the results of that testing, and not to provide an opinion on the effectiveness ofthe entity's internal control or on compliance. This report is an integral part of an auditperformed in accordance with Government Auditing Standards in considering the entity's internalcontrol and compliance. Accordingly, this communication is not suitable for any other purpose.

September 30, 2013

3

Report on Compliance with Requirements That Could Have aDirect and Material Effect on Each Major Program and on

Internal Control Over Compliance in Accordance With OMB Circular A-133



Compliance

We have audited the compliance of the Berrien Regional Education Service Agency (the"Agency") with the types of compliance requirements described in the U.S. Office ofManagement and Budget (OMB) Circular A-133 Compliance Supplement that could have adirect and material effect on each of its major federal programs for the year ended June 30,2013. The major federal programs of the Berrien Regional Education Service Agency areidentified in the summary of auditor's results section of the accompanying schedule of findingsand questioned costs. Compliance with the requirements of laws, regulations, contracts, andgrants applicable to each of its major federal programs is the responsibility of the BerrienRegional Education Service Agency's management. Our responsibility is to express an opinion onthe Berrien Regional Education Service Agency's compliance based on our audit.

We conducted our audit of compliance in accordance with auditing standards generally acceptedin the United States of America; the standards applicable to financial audits contained inGovernment Auditing Standards, issued by the Comptroller General of the United States; andOMB Circular A-133, Audits of States, Local Governments, and Non-Profit Organizations. Thosestandards and OMB Circular A-133 require that we plan and perform the audit to obtainreasonable assurance about whether noncompliance with the types of compliance requirementsreferred to above that could have a direct and material effect on a major federal programoccurred. An audit includes examining, on a test basis, evidence about the Berrien RegionalEducation Service Agency's compliance with those requirements and performing such otherprocedures as we considered necessary in the circumstances. We believe that our auditprovides a reasonable basis for our opinion. Our audit does not provide a legal determinationon the Berrien Regional Education Service Agency's compliance with those requirements.

In our opinion, the Berrien Regional Education Service Agency complied, in all material respects,with the compliance requirements referred to above that could have a direct and material effecton each of each of its major federal programs for the year ended June 30, 2013.

4

amanda.omalley

St Joe

amanda.omalley

Praxity


Internal Control Over Compliance

The management of the Berrien Regional Education Service Agency is responsible forestablishing and maintaining effective internal control over compliance with requirements oflaws, regulations, contracts, and grants applicable to federal programs. In planning andperforming our audit, we considered the Berrien Regional Education Service Agency's internalcontrol over compliance with requirements that could have a direct and material effect on amajor federal program in order to determine our auditing procedures for the purpose ofexpressing our opinion on compliance and to test and report on internal control overcompliance in accordance with OMB Circular A-133, but not for the purpose of expressing anopinion on the effectiveness of internal control over compliance. Accordingly, we do not expressan opinion on the effectiveness of the entity's internal control over compliance.

A deficiency in internal control over compliance exists when the design or operation of a controlover compliance does not allow management or employees, in the normal course of performingtheir assigned functions, to prevent or detect and correct noncompliance with a type ofcompliance requirement of a federal program on a timely basis. A material weakness in internalcontrol over compliance is a deficiency, or combination of deficiencies, in internal control overcompliance, such that there is a reasonable possibility that material noncompliance with a type ofcompliance requirement of a federal program will not be prevented or detected and correctedon a timely basis.

Our consideration of internal control over compliance was for the limited purpose described inthe first paragraph of this section and was not designed to identify all deficiencies in internalcontrol over compliance that might be deficiencies, significant deficiencies, or materialweaknesses. We did not identify any deficiencies in internal control over compliance that weconsider to be material weaknesses, as defined above.

The purpose of this report on internal control over compliance is solely to describe the scope ofour testing of internal control over compliance and the results of that testing based on therequirements of OBM Circular A-133. Accordingly, this report is not suitable for any otherpurpose.

September 30, 2013

5


See Notes to Schedule of Expenditures

of Federal Awards. 6

Schedule of Expenditures of Federal Awards


Program Title/Project Number Subrecipient Name

CFDA

Number

Approved

Awards

Amount

(Memo Only)

Prior Year

Expenditures

Accrued

(Deferred)

Revenue at

July 1, 2012

Adjustments

and

Transfers

Federal Funds/

Payments

In-kind

Received Expenditures

Accrued

(Deferred)

Revenue at

June 30, 2013

Clusters:

Child Nutrition Cluster - U.S. Department of Agriculture -

Passed through the Michigan Department of Education:

Non-Cash Assistance (Commodities) - 10.555

National School Lunch Program - Entitlement - 2012 - 2013 10,096$ - $ - $ - $ 10,096$ 10,096$ - $

Cash Assistance:

National School Breakfast Program: 10.553

2012-13 44,356 - - - 43,044 44,356 1,312

2011-12 45,207 45,207 1,079 - 1,079 - -

Total National School Breakfast Program 89,563 45,207 1,079 - 44,123 44,356 1,312

National School Lunch Program: 10.555

2012-13 78,776 - - - 76,792 78,776 1,984

2011-12 79,864 79,864 1,691 - 1,691 - -

Total National School Lunch Program 158,640 79,864 1,691 - 78,483 78,776 1,984

Cash Assistance Subtotal 248,203 125,071 2,770 - 122,606 123,132 3,296

Total Child Nutrition Cluster 258,299 125,071 2,770 - 132,702 133,228 3,296

Special Education Cluster - U.S. Department of Education:

Passed through the Michigan Department of

Education - Special Education Flowthrough:

Project number 130450 1213 84.027 6,231,947 - - - 4,948,746 6,143,185 1,194,439

Project number 120450 1112 84.027 6,143,649 5,985,859 1,497,080 - 1,615,048 157,790 39,822

Project number 130480 EOSD 84.027 50,000 - - - 50,000 50,000 -

Project number 130490 TC 84.027 58,000 - - - 48,154 58,000 9,846

Total passed through Michigan Department of Education 12,483,596 5,985,859 1,497,080 - 6,661,948 6,408,975 1,244,107

Passed through Macomb I.S.D. - MIBLSI Grant 1213 84.027 3,000 - - - 3,000 3,000 -

Passed through Macomb I.S.D. - MIBLSI Grant 1112 84.027 9,000 - (9,000) - - 9,000 -

Passed through Macomb I.S.D. - MIBLSI Grant 1011 84.027 16,000 15,027 (973) - - 973 -

Total Special Education Flowthrough 12,511,596 6,000,886 1,487,107 - 6,664,948 6,421,948 1,244,107




Schedule of Expenditures of Federal Awards (Continued)



CFDA

Number

Approved

Awards

Amount

(Memo Only)

Prior Year

Expenditures

Accrued

(Deferred)

Revenue at

July 1, 2012

Adjustments

and

Transfers

Federal Funds/

Payments

In-kind


Accrued

(Deferred)

Revenue at

June 30, 2013

Clusters (Continued):

Special Education Cluster - U.S. Department of Education (Continued):

Preschool Incentive:

Project number 130460 1112 84.173 202,084$ - $ - $ - $ 141,212$ 189,704$ 48,492$

Project number 120460 1112 84.173 201,897 169,312 37,818 - 65,323 32,585 5,080

Project number 110460 1011 84.173 202,063 202,063 16,495 - 16,495 - -

Total Preschool Incentive 606,044 371,375 54,313 - 223,030 222,289 53,572

Total Special Education Cluster 13,117,640 6,372,261 1,541,420 - 6,887,978 6,644,237 1,297,679

Title I, Part A Cluster - U.S. Department of Education -

Passed through the Michigan Department of Education -

Title I Regional Assistance Grant:

Project number 131570/2013 84.010 15,000 - - - 15,000 15,000 -

Project number 121570 1112 10,000 2,275 - - 7,725 7,725 -

Total Title I Cluster passed through Michigan Department of Education 25,000 2,275 - - 22,725 22,725 -

Medicaid Cluster - U.S. Department of Health and

Human Services - Passed through the Michigan

Department of Community Health -

Medicaid Outreach - 2012-201393.778 103,010 - - - 103,010 103,010 -

Total Medicaid Cluster 103,010 - - - 103,010 103,010 -

Educational Technology State Grants Cluster - U.S. Department of Education -

Passed through Calhoun I.S.D. -

Title II Part D; Enhancing Education Through Technology Act of 2001 -

Project number 114240-RDI-2 84.318 17,964 - - - 17,964 17,964 -

Total Clusters 13,521,913 6,499,607 1,544,190 - 7,164,379 6,921,164 1,300,975







CFDA

Number

Approved

Awards

Amount

(Memo Only)

Prior Year

Expenditures

Accrued

(Deferred)

Revenue at

July 1, 2012

Adjustments

and

Transfers

Federal Funds/

Payments

In-kind


Accrued

(Deferred)

Revenue at

June 30, 2013

Other federal awards:

U.S. Department of Education:

Passed through the Michigan Department of Education:

Title II Part A; Teacher/Principal Training & Recruiting: 84.367

Project number 130520 1112 1,145$ - $ - $ - $ - $ 1,145$ 1,145$

Project number 120520 1112 1,145 1,145 865 - 865 - -

Total Title II, Part A 2,290 1,145 865 - 865 1,145 1,145

Title III - Limited English Proficient Students: 84.365

Project number 130580 1213 89,365 - - - 74,936 75,999 1,063

Project number 120580 1112 84,357 24,124 1,564 - 13,012 11,448 -

Total Title II - Limited English Proficient Students 173,722 24,124 1,564 - 87,948 87,447 1,063

Title I, Part D - The Prevention & Intervention Programs for Children &

Youth who are Neglected, Delingquent or At-Risk: 84.013

Project number 131700 1213 163,217 - - - 134,086 150,041 15,955

Project number 121700 1112 193,176 132,126 40,508 - 40,508 - -

Project number 111701 1112 82,845 - - - 82,845 82,845 -

Total Title 1, Part D 439,238 132,126 40,508 - 257,439 232,886 15,955

Early Intervention Services (IDEA): 84.181

Project number 131340 1213 170,029 - - - 151,243 170,029 18,786

Project number 121340 190 167,872 167,872 28,147 - 28,147 - -

Total Early Intervention Services (IDEA) 337,901 167,872 28,147 - 179,390 170,029 18,786

Homeless Students Assistance Grants: 84.196

Project number 132320 1213 95,570 - - - 21,000 28,331 7,331

Project number 122330 1112-A 10,000 - - - 5,521 5,521 -

Project numbers 122320 1112 and 122320 1112-C 148,081 12,878 (14,625) - 72,738 87,363 -

Project number 112320 1011-C 98,911 78,800 24,236 - 24,236 - -

Total Homeless Students Assistance Grants 352,562 91,678 9,611 - 123,495 121,215 7,331







CFDA

Number

Approved

Awards

Amount

(Memo Only)

Prior Year

Expenditures

Accrued

(Deferred)

Revenue at

July 1, 2012

Adjustments

and

Transfers

Federal Funds/

Payments

In-kind


Accrued

(Deferred)

Revenue at

June 30, 2013

Other federal awards (Continued):

U.S. Department of Education:

Passed through the Michigan Department of Education -

Technical Education (Perkins III): 84.048

Project number 133520/131219 722,522$ - $ - $ - $ 719,813$ 722,522$ 2,709$

Project number 113520/111219 354,500 354,500 17,550 - 17,550 - -

Total Technical Education (Perkins III) 1,077,022 354,500 17,550 - 737,363 722,522 2,709

Total noncluster programs passed through

Michigan Department of Education2,382,735 771,445 98,245 - 1,386,500 1,335,244 46,989

Passed through Parents as Teachers National Center, Inc. -

Parents as Teachers 2012-13 84.215G 5,550 - - - 5,550 - (5,550)

Passed through Michigan Department of Community Health -

Michigan Maternal, Infant, and Early Childhood Home Visiting (MIECHV) 84.412

2012-13 5,000 - - - 5,000 5,000 -

Total non-clusters 2,393,285 771,445 98,245 - 1,397,050 1,340,244 41,439

Total federal financial awards 15,915,198$ 7,271,052$ 1,642,435$ - $ 8,561,429$ 8,261,408$ 1,342,414$





Provided to Subrecipients


Program Title/Project Number/Subrecipient Name

CFDA

Number

Current Year

Cash Transferred

to Subrecipient

Special Education Cluster:

Special Education Flowthrough - (P.L. 94-142 and Preschool Incentive) - Project numbers

130460 1213, 130450 1213 - Passed through to:

84.027 and

84.173

Berrien Springs 314,079$

Lakeshore 586,683

Niles 1,399,882

Total Special Education Flowthrough (P.L. 94-142 and Preschool Incentive) 2,300,644

Medicaid Cluster - Passed through to: 93.778

Benton Harbor 9,893

Benton Harbor Charter 1,454

Berrien Springs 9,122

Brandywine 4,892

Bridgman 3,462

Buchanan 5,690

Coloma 6,164

Countryside Charter 2,024

Eau Claire 3,077

Lakeshore 10,112

New Buffalo 2,289

Niles 13,678

River 264

River Valley 2,311

Riverside 229

St. Joseph 9,995

Watervliet 4,750

Dream Academy 901

M.C. Wells 553

Total Medicaid Cluster 90,860

Title II Part D; Enhancing Education Through Technology Act of 2011 - Passed

through to: 84.318

Benton Harbor 2,926


Brandywine 1,183

Bridgman 818

Buchanan 1,381

Coloma 1,539

Countryside Charter 395

Eau Claire 613

Niles 3,233

River Valley 633

St. Joseph 2,362

Watervliet 1,061

Total Educational Technology State Grant Cluster 17,665





Provided to Subrecipients (Continued)


Program Title/Project Number/Subrecipient Name

CFDA

Number

Current Year

Cash Transferred

to Subrecipient

Vocational and Technical Education (Perkins III) - Project number 133520/131219 - 84.048

Passed through to:

Benton Harbor 93,011$


Brandywine 17,360

Bridgman 9,877

Buchanan 19,421

Coloma 30,690

Countryside Charter 6,354

Lakeshore 29,503

New Buffalo 8,107

Niles 47,563

River Valley 9,370

St. Joseph 27,719

Lewis Cass ISD 114,058

Van Buren ISD 173,603

Total Vocational and Technical Education (Perkins III)610,851

Total federal funds passed through to subrecipients3,020,020$


Notes to Schedule of Expenditures of Federal AwardsYear Ended June 30, 2013

Note 1 - Basis of Presentation and Significant Accounting Policies

The accompanying schedule of expenditures of federal awards (the "Schedule") includesthe federal grant activity of the Berrien Regional Education Services Agency (BRESA)under programs of the federal government for the year ended June 30, 2013.Expenditures reported on the Schedule are reported on the same basis of accounting asthe basic financial statements, although the basis for determining when federal awardsare expended is presented in accordance with the requirements of OMB Circular A-133, Audits of States, Local Governments, and Non-Profit Organizations. In addition,expenditures reported on the Schedule are recognized following the cost principlescontained in OMB Circular A-87, wherein certain types of expenditures are notallowable or are limited as to reimbursement. Therefore, some amounts presented inthis Schedule may differ from amounts presented in, or used in the preparation of, thebasic financial statements.

Because the Schedule presents only a selected portion of the operations of BerrienRegional Education Service Agency (BRESA), it is not intended to and does not presentthe financial position, changes in net position, or cash flows of BRESA. Pass-throughentity identifying numbers are presented where available.

Note 2 - Grant Auditor Report

Management has utilized the Cash Management System (CMS) Grant Auditor Report inpreparing the schedule of expenditures of federal awards. Unreconciled differences, ifany, have been disclosed to the auditor.

Note 3 - Noncash Assistance

The value of the noncash assistance received was determined in accordance with theprovisions of OMB Circular A-133.

12


Schedule of Findings and Questioned CostsYear Ended June 30, 2013

Section I - Summary of Auditor's Results

Financial Statements

Type of auditor's report issued: Unqualified

Internal control over financial reporting:

Material weakness(es) identified? Yes X No

Significant deficiency(ies) identified that arenot considered to be material weaknesses? Yes X None reported

Noncompliance material to financial statements noted? Yes X No

Federal Awards

Internal control over major programs:

Material weakness(es) identified? Yes X No

Significant deficiency(ies) identified that arenot considered to be material weaknesses? Yes X None reported

Type of auditor's report issued on compliance for major programs: Unqualified

Any audit findings disclosed that are required to be reported in accordance withSection 510(a) of Circular A-133? Yes X No

Identification of major programs:

CFDA

Numbers Name of Federal Program or Cluster

84.027 Special Education Cluster - Special Education Flowthrough84.173 Special Education Cluster - Preschool Incentive84.048 Vocational and Technical Education (Perkins III)

Dollar threshold used to distinguish between type A and type B programs: $300,000

Auditee qualified as low-risk auditee? X Yes No

13


Schedule of Findings and Questioned Costs (Continued)Year Ended June 30, 2013

Section II - Financial Statement Audit Findings

None

Section III - Federal Program Audit Findings

None

14


Report to the Board of Education

June 30, 2013

To the Board of Education


We recently completed our audit of the basic financial statements of Berrien Regional Education

Service Agency (the “Agency”) as of and for the year ended June 30, 2013. In addition to our

audit report, we are providing the following results of the audit and informational comments

which impact the Agency:

Page

Results of the Audit

1-3

Informational Items

4-24

In addition to the comments and recommendations in this letter, our observation and comments

regarding the Agency’s internal control, including any significant deficiencies or material

weaknesses that we identified, have been reported to you in the report on internal control over

financial reporting and on compliance and other matters based on an audit of financial

statements performed in accordance with Government Auditing Standards. This report is included

in the supplemental schedule of federal awards (single audit report), and we recommend that

the matters we have noted there receive your careful consideration.

We are grateful for the opportunity to be of service to Berrien Regional Education Service

Agency. Should you have any questions regarding the comments in this report, please do not

hesitate to call.

September 30, 2013

kim.partlo

Praxity

kim.partlo

Benton Harbor

1

Results of the Audit

September 30, 2013

To the Board of Education


We have audited the financial statements of Berrien Regional Education Service Agency (the

“Agency”) as of and for the year ended June 30, 2013 and have issued our report thereon dated

September 30, 2013. Professional standards require that we provide you with the following

information related to our audit.

Our Responsibility Under U.S. Generally Accepted Auditing Standards

As stated in our engagement letter dated June 27, 2013, our responsibility, as described by

professional standards, is to express an opinion about whether the financial statements prepared

by management with your oversight are fairly presented, in all material respects, in conformity

with U.S. generally accepted accounting principles. Our audit of the financial statements does

not relieve you or management of your responsibilities. Our responsibility is to plan and

perform the audit to obtain reasonable, but not absolute, assurance that the financial statements

are free of material misstatement.

As part of our audit, we considered the internal control of the Agency. Such considerations

were solely for the purpose of determining our audit procedures and not to provide any

assurance concerning such internal control.

We are responsible for communicating significant matters related to the audit that are, in our

professional judgment, relevant to your responsibilities in overseeing the financial reporting

process. However, we are not required to design procedures specifically to identify such

matters.

Our audit of the Agency’s financial statements has also been conducted in accordance with

Government Auditing Standards, issued by the Comptroller General of the United States. Under

Government Auditing Standards, we are obligated to communicate certain matters that come to

our attention related to our audit to those responsible for the governance of the Agency,

including compliance with certain provisions of laws, regulations, contracts, grant agreements,

certain instances of error or fraud, illegal acts applicable to government agencies, and significant

deficiencies in internal control that we identify during our audit. Toward this end, we issued a

separate letter dated September 30, 2013 regarding our consideration of the Agency’s internal

control over financial reporting and on our tests of its compliance with certain provisions of

laws, regulations, contracts, and grant agreements.

kim.partlo

Praxity

kim.partlo

Benton Harbor

To the Board of Education September 30, 2013


2

Planned Scope and Timing of the Audit

We performed the audit according to the planned scope and timing previously communicated to

you in our meeting about planning matters on August 15, 2013.

Significant Audit Findings

Qualitative Aspects of Accounting Practices

Management is responsible for the selection and use of appropriate accounting policies. In

accordance with the terms of our engagement letter, we will advise management about the

appropriateness of accounting policies and their application. The significant accounting policies

used by Agency are described in Note 1 to the financial statements.

As described in Note 1, the Agency changed accounting policies related to Governmental

Accounting Standards Board Statements No. 62, No. 63, and No. 65. Our opinion is not

modified with respect to this matter.

We noted no transactions entered into by the Agency during the year for which there is a lack of

authoritative guidance or consensus.

There are no significant transactions that have been recognized in the financial statements in a

different period than when the transaction occurred.

Accounting estimates are an integral part of the financial statements prepared by management

and are based on management’s knowledge and experience about past and current events and

assumptions about future events. Certain accounting estimates are particularly sensitive because

of their significance to the financial statements and because of the possibility that future events

affecting them may differ significantly from those expected. There were no significant balances,

amounts, or disclosures in the financial statements based on sensitive management estimates.

The disclosures in the financial statements are neutral, consistent, and clear.

Difficulties Encountered in Performing the Audit

We encountered no significant difficulties in dealing with management in performing and

completing our audit.

Disagreements with Management

For the purpose of this letter, professional standards define a disagreement with management as

a financial accounting, reporting, or auditing matter, whether or not resolved to our satisfaction,

that could be significant to the financial statements or the auditor’s report. We are pleased to

report that no such disagreements arose during the course of our audit.

Corrected and Uncorrected Misstatements

Professional standards require us to accumulate all known and likely misstatements identified

during the audit, other than those that are trivial, and communicate them to the appropriate

level of management. We did not detect any misstatements as a result of audit procedures.

To the Board of Education September 30, 2013


3

Management Representations

We have requested certain representations from management that are included in the

management representation letter dated September 30, 2013.

Management Consultations with Other Independent Accountants

In some cases, management may decide to consult with other accountants about auditing and

accounting matters, similar to obtaining a “second opinion” on certain situations. If a consultation

involves application of an accounting principle to the Agency’s financial statements or a

determination of the type of auditor’s opinion that may be expressed on those statements, our

professional standards require the consulting accountant to check with us to determine that the

consultant has all the relevant facts. To our knowledge, there were no such consultations with

other accountants.

Other Audit Findings or Issues

As required by OMB Circular A-133, we have also completed an audit of the federal programs

administered by the Agency. The results of that audit are provided to the Board of Education in

our report on compliance with requirements applicable to each major program and on internal

control over compliance in accordance with OMB Circular A-133 dated September 30, 2013.

Other Information in Documents Containing Audited Financial Statements

Our responsibility for other information in documents containing the entity’s financial statements

and report does not extend beyond the financial statements. We do not have an obligation to

determine whether or not such other information is properly stated. However, we read the

management’s discussion and analysis and nothing came to our attention that caused us to

believe that such information, or its manner of presentation, is materially inconsistent with the

information or manner of its presentation appearing in the financial statements.

This information is intended solely for the use of the Board of Education and management of

Berrien Regional Education Service Agency and is not intended to be and should not be used by

anyone other than these specified parties.

Very truly yours,

Plante & Moran, PLLC

Jeffrey B. Dorn, CPA

Partner

4

Informational

Berrien Regional Educational Service Agency

Informational

5

State Aid Funding

Redefining State Aid and the Foundation Allowance - The fiscal year ended June 30, 2013

was the second year under a redefined funding approach for Michigan schools. While the

foundation allowance concept continues, changes in the funding strategy significantly impacted

your Agency’s 2012-2013 funding level and, with some modifications, those changes carry

forward into 2013-2014. The three changes are a permanent reduction of the LEA foundation

allowance, use of an incentive payment concept (best practice and student performance) and an

additional categorical to aid in paying for the significantly increased cost of the retirement system

(MPSERS).

Foundation - While not directly impacting your Agency, the LEA minimum foundation

allowance increases by $60 per pupil to $7,026 for 2013-2014 after receiving a per pupil

foundation reduction of $470 in 2011-2012. The net impact of the foundation allowance

reduction is that the LEA 2013-2014 minimum foundation allowance is 4.0 percent lower than

the foundation in place for the fiscal year ended June 30, 2011. Any district receiving less than

$7,076 will qualify for equity payments. An equity payment of at least $50 will be made to

districts with a foundation allowance less than $7,076. The payment is the lesser of $50 per

pupil or the difference between districts’ FY 2013-2014 foundation and $7,076. No equity

payments are provided if the foundation allowance exceeds $7,076. The equity payment is

considered a one-time revenue source and has not been rolled into the foundation allowance

formula.

Best Practice - For 2012-2013, the governor set aside $2 million in best practice funding for

Intermediate School Districts. In order to qualify, ISDs must meet four of five identified best

practices, many of which surround shared services with other districts. Your Agency qualified for

$43,566 in 2012-2013.

Performance Grants - In 2012-2013, LEAs could qualify for an additional categorical based on

the LEA’s ability to meet certain student performance measures. The maximum a district could

qualify for is $100 per pupil. For 2013-2014, performance funding continues. Depending on the

district’s student performance results, an LEA could receive one, two, or all three of the

allocations of $30/$30/$40 per pupil for performance measures met on MEAP or Michigan Merit

Examination scores.


Informational (Continued)

6

MPSERS Cost Support - The contribution rate the Agency is required to pay has continued to

rise. The Agency has no ability to influence the rate and no choice regarding its participation in

the program. Recognizing the costs are increasing under the current system, the 2012-2013

State Aid Act continued to include funding to LEAs, but not ISDs help pay for some of the

increased cost. Consequently, the Agency received $234,270 in categorical aid to help offset the

impact of the increase in the retirement costs, under what is termed Section 147a categorical

funding. The 2013-2014 State Aid Act continues this MPSERS cost support categorical, again to

LEAs, but not to ISDs, but at a lower level. In addition, near the end of the 2012-2013 fiscal

year, the State determined that additional support the State was paying into the retirement

system would now be distributed to LEAs and ISDs via their State Aid Status Report, and then

remitted by the Agency, in the exact same amount, to the Office of Retirement Services. This is

termed the Section 147c categorical funding. This payment represents approximately 4 percent

of covered payroll and does not increase Agency resources. Instead, the funding is recognized as

revenue and then returned directly to the retirement system. In general terms, this means that

the total cost of the retirement system contributions, representing approximately 29 percent of

covered payroll, is recognized as an expenditure in the Agency’s financial statements along with

related revenue that was previously considered state support to the system. The net effect is

that the Agency is responsible for an approximate 25 percent contribution to the retirement

system. This retirement funding approach continues into 2013-2014. The Agency budgeted for

additional State revenue and additional retirement expenditures in order to accommodate this

funding mechanism.

Other State Aid Act Changes Impacting 2013-2014

The amendments to the State Aid Act made several other changes impacting school districts.

Several changes we identified that could impact the Agency include:

2013-2014 Intent Language for Funding Levels - One legislature cannot bind another

legislature. However, the State Aid Act includes intent language regarding funding levels for

2014-2015.

Hold Harmless: Minimum $5 Increase - The changes in the packaging of school funding for

2013-2014 created the potential that some districts might actually incur a reduction in their state

funding. As a result, a categorical was added for districts not having an increase of at least $5

when adding up the foundation allowance increase, equity payments, and MPSERS cost offsets.

Districts in that situation will be provided with an increase of up to $5, meaning each district will

have a net increase of at least $5 per pupil. This funding is not added to the foundation

allowance and is considered one-time funding.



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Pupil Count Weighting - District membership blend will be based on a 90/10 split. The

funding will be based on 90 percent of the October pupil count and 10 percent of the following

February pupil count. This means when the initial fiscal year budget is prepared, 100 percent of

student counts and, therefore, foundation revenue is not known, since the February count will

not yet have occurred. In addition, for the first time, if a student moves to another school

district after the count date, the receiving district can claim a pro-rata share of the count with

the "sending" district having a like reduction. The tracking of students has become exponentially

more complex and now involves reporting and coordination through the Intermediate School

District and the State of Michigan.

Days and Hours - Increase in minimum days from 170 to 175. Maintains the hours at 1,098 but

eliminates the counting of 38 hours of professional development in 2014-2015.

Full-day Kindergarten - Beginning in 2012-2013, a full-day program is the expectation. Per

pupil funding for kindergarten students is reduced if the Agency does not provide a full-day

program.

Technology Infrastructure Grants - A total of $50 million will continue to be appropriated

for FY 2013-2014 to support technology improvements. The bill provides for $5 million of these

funds to be used for “whole-school” technology projects. Grants to aid districts in preparing for

upcoming computer adaptive testing did not pass the conference agreement.

Online Learning - New in 2013-2014, the Agency must offer online learning to students in

grades 5-12. A student can enroll in up to two courses per term, semester, trimester, etc. The

cost of each course is capped at 1/12th the foundation per semester.

Great Start Readiness Program - Funding has increased substantially to allow for program

expansion. The funding per half-day slot increased from $3,400 to $3,625. A minimum of 90

percent of the participation must come from families with income under 250 percent of the

poverty level. The funds are provided to the districts through the Intermediate School District.

State Aid Planning Considerations for 2013-2014 and Beyond

Michigan’s economy continues to show signs of improvement. As we have seen by the Revenue

Estimating Conference predictions, the School Aid Fund revenues are expected to grow, but at a

slow pace. The governor’s executive recommendation provided little increase for general

operations. Increases were concentrated in early childhood and in funding for the increasing

retirement obligation. The final State Aid Act amendments provided for some additional funds

for operations in 2013-2014 because the May revenue estimates showed some improvement.

However, this only provided for a small foundation increase ranging from $30 to $60 per pupil.

Because the future projections did not suggest additional increases could be sustainable, the

remaining revenues over the January estimates were provided as one-time revenues. Key

categoricals impacted by this were an up to $50 per pupil equity payment for districts with

foundations below $7,076, and maintaining the best practice per pupil allocation at $52 per

pupil. The availability of School Aid Fund resources to fund K-12 operations is further limited by

the use of the fund’s resources to fund higher education.



8

Clearly, the key issue facing the future of school funding is the need to cover the cost of the

retirement system. Because the costs continue to increase by amounts in excess of current

contributions, the funding theme in the future will continue to be how to use School Aid Fund

resources to cover the obligation. Funding this obligation will continue to impact the Agency’s

ability to receive additional resources to fund general education initiatives.

As the Agency looks to the future, careful planning will continue to be key. The use of budget

modeling will increase in importance, especially as it looks to assess the impact of one-time

funding resources on future funding projections. Given that many revenues are one-time

resources, we recommend the Agency fully analyze the finances before entering into multi-year

expenditure agreements.

School Aid Fund Dynamics

In the last two years, public education has seen more change in the substance of school funding

than in the last 10 years. Proposal A, as passed, was a K-12 funding mechanism. Prior to 2011,

there were a series of small changes to the funding model. Some activities, previously funded

with the State’s General Fund, were moved to school aid. General Fund earmarks for the School

Aid Fund have been reduced since 1994. Prorations became commonplace as the School Aid

Fund’s ability to generate new revenue slowed. Over time, some categorical revenues were

eliminated and some were created. Federal funds were added on a temporary basis to

supplement state funding shortfalls. Essentially, the changes were viewed as incremental

modifications.

Beginning with the 2011-2012 amendments to the State Aid Act, we experienced a redefinition

of the funding model. Districts experienced a $470 per pupil funding cut which actually

“revalued” the foundation and created a new base. Along with the governor’s education

initiatives, the concepts of “best practice” and “rewarding” student performance were entered

into the funding scheme. And most significant, the funding for higher education was moved from

the General Fund into the School Aid Fund. This comprehensive view and approach to the

management and funding of education created a new definition of reality for Michigan schools.

This new reality continued into the amendments to the State Aid Act for 2013-2014.

Implications from this change in funding approach are substantial and will change how a district

will be able to generate additional state funding into the future. The additional revenues

identified after the May 2013 Revenue Estimating Conference created only a small increase to

the basic foundation allowance. Instead, the "pay for performance" concept was continued at

current levels and new resources were provided to fund the early childhood education program.

Once again, funds were also set aside as an additional contribution to the retirement system. It is

clear, based on future projections, that the increased costs of the retirement system will absorb

significant resources from the School Aid Fund. Based on the funding priorities from this

legislative session, it appears the focus will continue to be on increasing student performance

and funding the costs of the retirement system.



9

As the Agency continues to evaluate and select its operational and educational initiatives, it will

be increasingly important to monitor the implications from legislative action. As the governor

and legislature move forward with their agenda, it is likely there will be new elements producing

significant impact on the funds received by the Agency from the State.

MPSERS Reform and Future Contribution Rates

Over the last five years, the Michigan legislature enacted several reforms designed to curb the

rising contribution rates and perpetual under-funded situation of the Michigan Public School

Employees’ Retirement System (MPSERS). These reforms included early retirement incentives,

employee funding of a portion of retiree health costs, a tiered rate and benefit structure for

employees hired after July 1, 2010, and certain other provisions. These provisions were designed

to avert a long-term financial crisis with the Plan. The impact of investment declines during 2008

and 2009, coupled with a shrinking base of contributing active lives funding an ever-increasing

number of retirees, continue to result in rising costs of sustaining the MPSERS program.

The 2011-2012 State Aid Bill contained two provisions designed to defray a portion of these

costs. A total of $155 million was set aside from the School Aid Fund (SAF) for one-time

allocations that local school districts used to offset their annual retirement contribution in 2012.

Similar funding for MPSERS offsets are being provided in 2012-2013 in the amount of $160

million. Also in 2011-2012, $133 million was taken from the SAF to be held in a “Retirement

Obligation Reform Reserve Fund” and utilized for future pension reform needs. During 2012-

2013, an additional $41 million was added to this fund. To date, these funds remain in the

Reserve Fund and no decision has been made regarding their use.

Public Act 300, signed by the governor in September 2012, created certain caps that essentially

placed the employer contribution rate at 24.46 percent, created retirement plan alternatives

which could modify the rate, increased employee contributions, provided for future employees

to receive defined contribution instead of the current defined benefit for health care, and began

prefunding health care benefits from a pay-as-you-go method to a combination of employee

contributions, employer contributions, and state funding. The capped elements of the overall

rate will mean that the SAF will be responsible to fund any unmet required contributions

determined by the actuaries. A concern is that the state funding needed to keep the rate down

may limit the ability for the SAF to provide any increases in the foundation allowance and other

categoricals. This will be a key factor to watch over the next few years. Shortly after PA 300

was signed, districts were notified that due to the legal challenges submitted related to the 3

percent contribution from employees, the retirement rate would increase. The overall rate,

effective October 1, 2012, increased to 25.36 percent of covered payroll, and on February 1,

2013, once the temporary restraining order on PA 300 was lifted, decreased slightly to 24.32

percent. The rate for 2013-2014 again increased slightly to 24.79 percent of covered payroll.

This .47 percentage point increase represents an actual increase of 1.9 percent. Until the

Supreme Court rules on the constitutionality of the 3 percent contribution from employees, the

rate is expected to remain at this higher number.



10

For your Agency, the new rate overall rate of 24.79 percent for 2013-2014 will represent

approximately $3,374,865 in total pension costs and retirement health care costs. We will

continue to keep you informed as the changes to the retirement system unfold.

Federal Grants Management Update

Supplement vs. Supplant - Most federal grant agreements require that federal funds add to or

"supplement" current nonfederal programs. It is important for the Agency to understand the

specific rules for supplement vs. supplant for each grant and be able to document how the

requirement was met. One program where significant pressure on availability of general

operating funds could create increased risk is Title I. Annually reviewing the spending plan for

Title I and similar programs is an important element to ensure the district meets the related

supplement requirements.

Special Education Maintenance of Effort - For fiscal year 2012-2013, the State of Michigan

continues to operate the approach which analyzes maintenance of effort on an aggregate basis

by ISD. Therefore, if an ISD passed, the local district was deemed to have passed as well. If a

district passes and the ISD does not pass, the district is considered in compliance unless they

receive notification otherwise. If a district fails and the ISD passes, it is important to get

confirmation from the ISD that the district is not at risk. The Agency should continue to track

maintenance of effort individually and coordinate a plan with the ISD to ensure effort is being

maintained.

Special Education Excess Cost Determination - “Excess costs” are those costs incurred for

the education of an elementary school or secondary school student with a disability that are in

excess of the average annual per student expenditure in a school district during the preceding

school year. School districts are required to compute the minimum average amount of per pupil

expenditure separately for children with disabilities in its elementary schools and for children

with disabilities in its secondary schools, and not on a combination of the enrollments in both.

The Michigan Department of Education (MDE) continues to work on a tool which would assist

districts in computing the minimum average amount. Once this tool is finalized, the MDE will

provide additional guidance and the Agency will be required to show compliance. It is important

the Agency be aware of this requirement and be prepared to demonstrate compliance for fiscal

year 2013-2014.

Special Education Proportionate Share - One of the requirements of the IDEA federal grant

is that the Agency expends a proportionate share of its allocation on services related to

parentally placed private school children with disabilities enrolled in private elementary and

secondary schools. The Michigan Department of Education issued guidance on the computation

for determining the percentage. The Agency should be aware of this requirement and should

retain documentation supporting the percentage computed as well as evidence of expenditures

related to these required services.



11

Fiscal Monitoring - The Michigan Department of Education (MDE) continues to focus on the

grants fiscal monitoring process. This process focuses on the financial aspects of grants

management with an emphasis on control procedures assessments in the key compliance areas

of the grant. These actions continue as part of the increased federal emphasis for pass-through

entities (the State of Michigan) to improve their monitoring efforts. To assist districts in their

compliance efforts, the State has issued a self-evaluation checklist which will allow districts to

identify areas which may require additional attention. In addition, the MDE has developed

sample written compliance procedures for districts to consider when improving the quality of

documentation maintained by the Agency. We highly recommend the Agency obtain the

checklist and the sample procedures (located on the MDE website) and self-assess their

processes and documentation against the types of items the MDE is focused upon.

Documenting Work Performed - A fundamental requirement for federal grants is to

document the work performed to fulfill the grant requirements. The method defined in the

regulations prescribes the use of a Personnel Activity Report (PAR). Essentially, this is a more

detailed time sheet. When performing our audit, we requested a PAR to prove effort and

allocation of cost for employees charged to your federal grants. School districts retain the ability

to use a “certification” in certain situations in lieu of a PAR and certifications are acceptable

when allowable. If the criteria for certifications are not met, a PAR must be used.

Written Procedures for Grants

As part of your single audit annually, the auditors are required to assess the written procedures

that exist related to the specific compliance requirements for the federal programs that are

selected for testing. It is important for the Agency to be aware of the comprehensive list of

required written procedures required for federal grant participation. The Michigan Department

of Education continues to emphasize the importance of maintaining adequate written

procedures for grants, as discussed in the 2012-2013 Accounting and Audit Alert. The

department has added example procedures to the Office of Audits website for reference. These

requirements are described in 34 CFR Part 80, 2 CFR Part 215, and OMB Circular A-133

Compliance Supplement Part 6 and include the following:

• Financial management systems

• Payments

• Allowable costs

• Period of availability

• Matching or cost sharing (if applicable)

• Program income (if applicable)

• Procurement

• Equipment and real property (if applicable)

• Supplies

• Copyrights (if applicable)

• Subawards to debarred and suspended parties

• Monitoring and reporting program performance (if applicable)

• Financial reporting



12

• Retention and access requirements for records

• In addition, districts should also have written procedures for:

o Cash management

o Conflict of interest

o Payroll

o Federal timekeeping

The Agency should be aware the written procedures are more extensive in nature than the

written documentation required for a financial statement audit, which focuses on key controls

related to grants management.

We encourage the Agency to review its procedures and the documentation of such procedures

to ensure that the items listed above have been addressed. The procedure itself is not required

to be specific to federal grants as long as it has applicability to the grants as well. Many, if not all,

of the items may already be addressed in various different forms throughout the Agency’s

policies and procedures. It is important the Agency be aware of where the documentation

resides to cover the items listed above. The MDE has been performing federal program fiscal

monitoring and will request these procedures when on site. If any items are not currently

addressed, we recommend the Agency evaluate putting procedures in place and document them

accordingly. The MDE has placed sample policies on their website which can be used as either a

guide or implemented as provided. Please note, MDE views these as "safe harbor" and will

accept their approved documents as demonstrated compliance with the rules. The documents

can be located at www.michigan.gov/mde and then navigate to the Office of Audits webpage.

Federal Program Expenditure Documentation

For an employee who works solely on a single federal program, required documentation

includes a “certification” that the employee worked solely on a particular federal program for

the period covered by the certification

The certification must be prepared at least semi-annually and signed by the employee or a

supervisory official having firsthand knowledge of the work performed by the employee.

For an employee who is partly funded by a federal program but works in a “single cost

objective” (that is, they perform the same function the entire day but are not 100 percent

federally funded), the certification requirements above apply.

For districts that have a “school wide” building as defined by the Title I regulations, employees

charged to federal grants within that building can use the certification requirements to support

the time charged to the federal grant.



13

If an employee works on more than one federal award or part of their time is spent in

nonfederal award areas (and the services are not considered a single cost objective), required

documentation includes a personnel activity report (PAR). Instructional staff may use their lesson

plans as documentation to support PARs (not replace them) only if all of the following criteria

are met:

• After-the-fact notes are made on those plans to indicate the completion of each scheduled

activity.

• The lesson plans account for the total time the employee is compensated.

• The lesson plans are prepared at least monthly and coincide with one or more pay periods.

• The completed lesson plans are signed by the employee. The district must retain the lesson

plans as documentation supporting the PAR.

The documentation requirements can be very confusing. We recommend the Agency review

their documentation procedures and compare the procedures to the State-issued clarifications

to ensure procedures are sufficient to comply with federal requirements. Specific attention

should be paid to those employees whose roles and responsibilities may have changed from one

year to the next, as the documentation required for their payroll may have changed.

ESEA - Education Elementary and Secondary Education Act

In July 2012, the U.S. Department of Education approved Michigan’s request for flexibility in

implementing certain requirements of the Elementary and Secondary Education Act (ESEA also

known as the No Child Left Behind Act). Michigan requested flexibility in 11 out of 12 ESEA

provisions. For a detailed summary of the waivers, please see:

http://www.michigan.gov/documents/mde/Final_7.19.12_Waiver_Summary_and_Benefits_3928

64_7.pdf?20130623111051.

This flexibility approval will:

• Allow local school districts more freedom in how they use federal dollars to improve student

achievement and close achievement gaps

• Recognize schools that are meeting or exceeding achievement goals

• Ensure students have effective educators in their schools

• Create a more robust accountability scorecard that includes science, social studies, and

writing in addition to the NCLB-required content areas of math and English language arts



14

Two amendments to the approved ESEA flexibility request were approved in December 2012,

and three additional amendments were approved in February 2013. An additional amendment

was proposed and presented in June 2013. The revised amendment would exempt special

education centers/center-based programs from identification on the priority, focus, and reward

schools lists and from inclusion on the annual statewide top-to-bottom ranking. This amendment

to the approved request for ESEA flexibility is currently outstanding and still in legislation.

These changes primarily affect the Agency’s “Title” programs and potential implications of these

changes should be considered when planning for the Agency’s use of the impacted federal

programs.

Budgeting Strategy in Difficult Financial Times

Over the last several years, Michigan schools have struggled with the reality that the State has

not been able to significantly increase school funding to keep pace with rising costs. Not only are

the funding levels not increasing, in FYE 2012, districts also experienced a significant cut to their

foundation allowance, which was permanent. Certain forms of additional funding were provided

to offset some of these cuts over the past two fiscal years, but these are not automatic for all

districts to receive, and many are based on meeting certain criteria. Many of these funding

mechanisms have been continued for fiscal year 2014, but most are not guaranteed for years

after 2014.

Clearly, the Agency’s budget plan for 2014 and beyond will continue to require difficult financial

decisions of a significant scale, and will need to consider the inconsistent funding levels at the

state level. For the last several years, districts have been required to examine how educational

programs and services need to be adapted or redefined to cope with the funding issues while

meeting educational needs of the students. These tasks are not easy, but in the end the decisions

made could become opportunities to redesign how services are provided and educational

objectives are met. If the Agency can identify opportunities to “do things differently,” it may be

able to mitigate some of the negative effects of a reduced funding environment.

Uniform Budgeting and Accounting Act

The Michigan Department of Education (MDE) continues to monitor Agency compliance with

the Uniform Budgeting and Accounting Act. The MDE reviews the annual audited financial

statements and identifies any district or public school academy whose total expenditures exceed

their budget by more than 1 percent. In addition, the same test is applied to other financing

sources (uses). The MDE is also reviewing certain revenue shortfalls as being a violation. For a

revenue shortfall to be a violation, it has to represent a variance greater than 1 percent of the

total budgeted revenue and the Agency’s fund balance must have been depleted beyond what

had been approved by the Board of Education.



15

Violations result in a letter being sent to the Agency. If an adequate response is not received

back from the Agency, the MDE will refer the Agency to the Attorney General’s office for

possible further action. If your Agency receives a violation notice from the MDE, you will have

two weeks to provide the MDE with information regarding the Agency’s procedures to detect

and prevent violations of the act. The MDE will then decide, based on your response, on the

appropriateness of referring the violation to the Attorney General’s office for further

consideration.

Obviously, as you go forward, it is strongly advised that the board and administration review the

Agency’s policies and procedures in this area in order to prevent violations. The key factor in all

this new enforcement effort is an emphasis on the board’s responsibility to approve all

expenditures via the budget process and avoid any deficit fund balance.

GASB No. 68, Pension Standards

In June 2012, the GASB issued GASB Statement No. 68, Accounting and Financial Reporting for

Pensions, which will be effective for the Agency’s June 30, 2015 financial statements. Statement

No. 68 requires governments providing defined benefit pensions to recognize their unfunded

pension benefit obligation as a liability for the first time, and to more comprehensively and

comparably measure the annual costs of pension benefits. Due to the Agency's participation in

the Michigan Public School Employees' Retirement System (MPSERS), the Agency will be

required to report the difference between the Agency’s share of the MPSERS pension plan net

assets and the pension obligation liability as an asset or liability in the basic financial statements

(at the government-wide level and in proprietary funds - but not in governmental funds). This

will be called the “net pension liability” or “net pension asset.” The data required to record this

liability will come from the retirement system. Changes in the net pension liability will generally

be reported as pension expense at the government-wide level and in proprietary funds.

Currently, the unfunded liability associated with retiree health care is not included in the

computation, but may be added in the future. The statement also enhances accountability and

transparency through revised note disclosures and required supplemental information (RSI).

GASB No. 63, Financial Reporting of Deferred Outflows of Resources, Deferred Inflows of

Resources, and Net Position, and No. 65, Items Previously Reported as Assets and

Liabilities

Effective for the year ended June 30, 2013, the Agency has implemented GASB Statement

No. 63 and adopted early implementation of GASB Statement No. 65. GASB No. 63 provided

guidance on financial reporting related to deferred outflows of resources and deferred inflows of

resources. The pronouncement impacted the Agency’s governmental fund-based, government-

wide, proprietary, and fiduciary fund financial statements.

The objective of this statement was to improve financial reporting by standardizing the

presentation of deferred outflows of resources and deferred inflows of resources and their

effects on a government's net position. It alleviated uncertainty about reporting those financial

statement elements by providing guidance where none previously existed.



16

"Deferred inflows" and "deferred outflows" are defined as follows:

Deferred Inflows - An acquisition of net assets by the government that is applicable to a future

reporting period. The most common examples for a school district would be assets recorded in

governmental fund financial statements where the revenue is not yet available, such as certain

grant reimbursement requests.

Deferred Outflows - A consumption of net assets by the government that is applicable to a future

reporting period. The most common example for a school district would be deferred funding

charges paid on bonds. These would be shown only on the government-wide statement of net

position.

This year, the Agency’s statement of net assets (the government-wide statement) has been

renamed to the statement of net position. Components of the statement of net position include

assets, deferred outflows of resources, liabilities, deferred inflows of resources, and net position.

Net position continues to be reported in three categories, including net investment in capital

assets, restricted, and unrestricted. The governmental fund balance has also changed to include

the new components of deferred outflows and deferred inflows of resources; however, it

continues to use the balance sheet presentation that has always been used and has retained the

terminology “fund balance” vs. “net position.”

At the time of issuance of GASB No. 63, the standard stated that nothing on the balance sheet

could be classified as a deferred inflow or outflow until specifically proscribed by the GASB.

GASB No. 65 was then issued to close the loop on the concepts of deferred inflows and

deferred outflows as a result of the issuance of GASB Statement No 63. GASB No. 65

reclassified, as deferred outflows or deferred inflows of resources, certain items that were

previously recorded as assets and liabilities. In addition, the GASB also found certain items that it

felt should not hit the balance sheet at all; as a result, this statement requires recognition of

those items as either an outflow (expenditure/expense) or inflow (revenue) of resources.



17

The following are examples of items that have changed presentation under GASB No. 63 and

No. 65:

Account Balance Treatment

Debt refunding - Difference between reacquisition price and

carrying value of debt (or lease)

Deferred inflow

Resources received (or receivable) before the period resources

may be used

Deferred inflow

Government mandated nonexchange revenue or voluntary

nonexchange resources received before eligibility requirements are

met (excluding time requirements)

Liability

Awaiting just time requirements Deferred inflow/outflow

Debt issuance costs Expense

Prepaid insurance costs Asset (then amortized)

Operating leases - Initial direct costs Expense

Insurance - Acquisition costs Expense

Governmental funds - Revenue that is not available Deferred inflow

One other important provision in GASB Statement No. 65 relates to the use of the term

"deferred." Under this pronouncement, the GASB has restricted the use of this terminology only

to items reported as deferred inflows or deferred outflows. Items which had previously been

termed “deferred revenue” will now be called "unearned revenue."

For your June 30, 2013 financial statements, a note was added to alert the reader this

pronouncement has been implemented by the Agency.

Reconcile Property Tax Data

The State of Michigan recently conducted audits of school district taxes captured by TIFA, DDA,

and LDFA taxing authorities compared to state records. The audits have revealed that many

differences exist between the amounts actually captured by the authorities and the amounts

which have been reported to the State. This has resulted in many districts receiving claims for

repayment of state aid overpayments back to the State of Michigan. These findings illustrate the

necessity of local districts that are impacted by TIFAs, DDAs, or LDFAs to perform independent

reconciliations of their property tax revenue and related state aid payments.

This process is simplified now due to the accessibility of on-line taxable value information. We

encourage the Agency to actively reconcile its property tax and state aid information on a

regular basis to identify any inconsistencies in taxing value reported to the State of Michigan.



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Pupil Accounting

During these tough economic times, each Agency dollar counts. One primary source of Agency

funding is the student counts produced during the fall and winter semesters and submitted to

the State via the Single Record Student Database (SRSD). Districts should evaluate their existing

pupil accounting processes and systems to ensure that they are reporting accurate student

counts to maximize their funding potential. This evaluation should consider the current pupil

accounting processes (from the Agency, ISD, and State perspective); explore organizational

issues related to pupil accounting; and the appropriate use of technology to enhance the pupil

accounting process.

School Building Performance

Academic performance continues to be a critical issue for all Michigan schools. Several years ago,

No Child Left Behind (NCLB) implemented requirements related to school building academic

performance. For the last several years, each building has been monitored to determine if it is

making adequate yearly progress. These requirements continue. As part of the state legislation

enacted to qualify for Race to the Top funds, a requirement was created to monitor building

academic performance and identify the bottom 5 pecent of school buildings. This listing is

accessible from the MDE web site.

The Education Achievement Authority (EAA) plan is a statewide school system that operates the

lowest performing 5 percent of schools in Michigan not achieving satisfactory results on a

redesign plan or that are under an emergency manager. This school system is essentially a

charter school system and has begun its implementation with underperforming buildings

identified within Detroit public schools. The intention is to expand the system to include other

underperforming schools throughout the state over time. According to the MDE, this system is

“designed to provide a new, stable, financially responsible set of public schools that create the

conditions, supports, tools, and resources under which teachers can help students make

significant academic gains." Under this new charter school system, the ultimate power for

running each school is placed in the hands of the principal, teachers, and staff at the school. It

allows principals to hire, place, train, and support teachers with a focus on continuous

improvement based on student needs. Schools remain in the EAA until they show marked

progress for their students, at which time they can choose to stay or return to their public

school system.

Process Redesign

Given the current economic climate, school districts face continued pressure to do more with

fewer resources. Staff sizes have been reduced in many districts, while demands for services

and reporting requirements have increased. If you have experienced staff reductions, you may

benefit from reviewing and redesigning your processes to ensure that only value-added steps are

included in the process. Process redesign involves mapping current processes (e.g., facilities

work orders, purchasing, payroll) and identifying potential improvements by leveraging

technology systems and/or eliminating steps. Additional benefits include setting stakeholder

expectations for services and response rates, which is particularly important after staffing

reductions.



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Cyber Schools

Cyber schools are public schools which allow students to complete their coursework online

rather than attend a traditional school setting. Michigan law, up until now, allowed for only two

cyber charters to exist. Enrollment in these cyber schools was capped at 400 students in the first

year with a maximum of 1,000 students each. The new cyber school law is part of the

governor’s education reform initiative which is aimed at improving the State’s approach to

education. The new law will now allow up to five cyber charter schools to open by December

31, 2013, 10 by December 31, 2014, and 15 by December 31, 2015. Enrollment will be

restricted in each cyber charter to 2,500 in the first year, 5,000 in the second year, and 10,000 in

the third and subsequent years. No more than 2 percent of the state’s student population would

be allowed to enroll in cyber charters. Consideration of the cyber school legislation should be

part of the Agency's budgeting process when doing enrollment projections.

Legislative Caps on Employee Health Benefits Spending (Hard Caps or 80 percent/20

percent)

Public Act 152 of 2011 limits the amount public employers can contribute financially toward the

medical benefits provided to employees. The law took immediate effect and no agreements can

be settled after September 27, 2011 which conflict with the new law. The act gives public school

employers two options of how to limit the funding of medical costs. The first (and default)

option available to employers would impose hard dollar employer-funding caps. As of January 1,

2013, the limit on the amount that a public employer may contribute is $15,525 for family

coverage, $11,385 for two-person coverage, and $5,693 for individuals.

The second option available to employers would limit a public employer’s funding of medical

benefit costs to 80 percent. Electing this option requires a majority vote of the school board.

School districts are not eligible to opt out of the options above, unlike other public entities. The

law provides for penalties to the Agency for noncompliance, including withholding 10 percent of

the school aid payments. One of the two options must be in place to avoid any penalties.

Compliance with the funding limitations begins at the first plan year on/after January 1, 2012 or

at the expiration/amendment/renewing of the then-current collective bargaining agreements.

Contracts enacted after September 27, 2011 cannot contain provisions contrary to the law.

School districts will be told to evaluate the current cost of benefits and the future financial

impact of each option. Furthermore, a review of how benefits are offered to employees is

encouraged to address the following: affordability of benefits for lower compensated employees,

recruitment/retention of staff, and long-term viability of benefit plans.



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Affordable Care

In 2010, the Patient Protection and Affordable Care Act (PPACA) was passed in an effort to

reduce the cost of health care, extend care to virtually all Americans, and improve the delivery

and quality of health care. Since becoming effective, many parts of the law have been enacted.

More recent DOL, IRS, and/or Treasury notices have been provided, specifically the delay of the

shared responsibility mandate for large employers in 2014. Employers should take care and

consider an advance strategy to ensure compliance with PPACA so that application of any

penalties due to noncompliance with the play or pay/shared responsibility mandates is avoided.

The Patient Protection and Affordable Care Act (PPACA) sets forth a number of requirements

that large employers need to consider in order to avoid the potential application of penalties due

to noncompliance. Here are a few questions your Agency should consider:

Have you reviewed the staffing of your Agency to determine your status as a large employer

- 50 or more staff including full-time and full-time equivalents?

Have you examined the affiliated business relationships to determine if the shared

responsibility rules apply to your Agency (possible with some contractual relationships)?

Are you certain that your Agency’s eligibility rules meet the requirements of PPACA (staff

working 30 or more hours/week)?

Have you evaluated the plans that are available to ensure they satisfy the minimum essential

coverage requirements (are all the required coverage elements included at or above the

minimum values)?

Are your plans affordable, as defined by the law?

If assistance is needed with answering these questions, contact your plan advisor or connect with

a Plante & Moran, PLLC benefits professional.

Fund Balance

Given the continued uncertainties with State funding, we feel that it is important for the Agency

to maintain an appropriate level of fund equity. We believe that the benefit of the Agency

maintaining an appropriate amount of fund equity allows the Agency the ability to maintain its

current level of programs, while being able to meet unforeseen circumstances, like the

implementation of state aid proration. This becomes especially important due to the funding

caps imposed by school finance reform, retirement costs, health care, energy, and other cost

pressures, and cash flow needs due to the fact about 18 percent of the Agency’s state aid is

received after the school year has ended, as well as concerns over the financial health of the

School Aid Fund in 2013-2014 and beyond.



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During the 2012-2013 school year, the Agency’s General Fund revenue exceeded expenditures

by approximately $266,000. This, in conjunction with increases in nonspendable and assigned

fund balance, resulted in decreasing the unassigned General Fund balance to approximately

$1,733,000 at June 30, 2013. During the 2012-2013 school year, the Agency’s Special Education

Fund expenditures exceeded revenues by approximately $2,594,000. This, in conjunction with

increases in other restricted fund balance, resulted in decreasing the restricted general purpose

Special Education Fund equity to approximately $3,614,000 at June 30, 2013.

Fund balance goals are often stated in terms of a percentage of total expenditures. As a point of

reference, the statewide average for school districts at June 30, 2012 (excluding Detroit) is

approximately 11 percent of expenditures. Fund equity of 5.5 percent of expenditures would

approximately equal the Agency’s average accounts payable and payroll for a three-week period,

while 11 percent would approximately equal six weeks. The Agency’s unassigned General Fund

equity percentage is 21.4 percent and equals approximately 11.7 weeks of operation. The

Agency’s general purpose Special Education Fund equity percentage is 10.4 percent and equals

approximately 5.7 weeks of operation. However, the amount that exceeds 10 percent will be

paid to LEAs in the form of excess fund equity, leaving an amount for approximately five weeks

of operation. Clearly, as the Agency moves through 2013-2014, it will face unprecedented

challenges in this area given the funding plan put in place by the State coupled with fringe benefit

and other costs.

Legislative Reminders

As a reminder, Public Act 54 became effective in June 2011 and provides that from the date of

expiration of a labor contract to the date of a new contract, the wage and benefit costs under

the expiring contract must continue. In essence, no retroactive pay adjustments can be made.

Another subtlety to the bill is that any increases in fringe benefit costs during the period must be

borne by the employees, and the Agency is entitled to institute payroll withholding for these

increased costs. With many collective bargaining agreements expiring in the near future,

attention should be paid to this legislation.

Understanding the EFM Act

Local Financial Emergency Law (Public Act 436 of 2012)

The Local Financial Stability and Choice Act, Public Act 436 of 2012, was effective on March 28,

2013. This act repeals Public Act 72 of 1990 and the former 2011 PA 4. Legislators felt this

amendment was necessary in order to protect and assure the financial accountability of local

units of government and school districts. This act will provide review, management, planning,

and control of the financial operation of local units of government and school districts.



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A violation of a triggering event could cause the State Superintendent of Public Instruction to

conduct a preliminary review for financial problems. There are 18 triggering events. The most

applicable to school districts are as follows:

1. Violating the budget act section regarding expenditures not exceeding budget

2. Failing to file a timely, conforming annual audit

3. Breaching obligations under a deficit elimination plan

4. Ending its most recently completed fiscal year with a deficit without submitting a deficit

elimination plan within the required timeframe

While these are not the only triggers for districts to be concerned with, they may be the most

likely to occur in troubled situations.

During the preliminary review, if a finding of probable financial stress is made, the governor shall

appoint a review team that will conduct a detailed review of the financial condition. This review

team must hold at least one public meeting and has 60 days to complete its work and file its

report with the governor. After receiving the report from the review team, the governor has 10

days to decide whether a financial emergency does or does not exist. If the governor declares a

local financial emergency, then the elected board of the school district must choose one of four

options, which is one of the key differences with PA 436. These options consist of a consent

agreement, bankruptcy, mediation, or the appointment of an emergency manager.

It is not the State’s intention to declare a financial emergency except in cases of extreme financial

distress when district management and officials have been unable to correct problems on their

own. We encourage you to monitor the 18 factors that may trigger a review and take steps at

the local level to rectify emerging financial problems. We are available to assist and strategize in

any way possible, from identification of financial duress to assistance with revenue

producing/expenditure reductions plans.

Deficit District Requirements and Enforcement

The Michigan Department of Education (MDE) has seen a dramatic increase in the number of

districts which are entering, or going further into, deficit. As a reminder, MCL 388.1702

prohibits districts from adopting deficit budgets or incurring deficit fund balance, along with

MDE corrective action requirements and enforcement activities that will be undertaken for

districts budgeting for or entering actual deficits. Although the law and requirements are not

new, the MDE will be taking stricter enforcement action in response to the worsening financial

condition experienced by many districts.



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Following are highlights of the deficit elimination requirements:

Upon discovery of an actual deficit or adoption of a deficit budget, the Agency must notify

the MDE immediately. The MDE will require the Agency to submit a deficit elimination plan

(DEP) within 30 days.

The DEP must provide for the deficit to be eliminated within two years. Specific actions to

reduce the deficit must be described and must be attainable.

The Agency must submit monthly budgetary control reports to the MDE for monitoring until

the deficit is eliminated.

The Agency must post their DEP on their website.

Section 102 of the Budget Law provides for State aid payments to be withheld from districts that

do not conform to the above requirements, or do not take the actions necessary to cure the

deficit as outlined in their DEP. Although the State has granted exceptions to the withholding of

state aid in the past, this action is being invoked more aggressively to ensure that districts are

taking full responsibility for curing their deficit. Clearly, a district in deficit will experience

substantial cash flow problems should this withholding occur.

In addition to cash flow problems, entering a deficit may also trigger difficulty in obtaining

affordable financing, legal sanctions against district officials, cumbersome reporting burdens on

management, and potential loss of local control under the new emergency manager rules. We

encourage the Agency to be fully knowledgeable about these rules and take every step

necessary to remain compliant. Once a district thinks they will be entering a deficit, we highly

recommend notification be sent to the MDE in order to open the lines of communication and

avoid any surprises to all interested parties.

Clarity Standards

Recently, the auditing standards have changed in order to better clarify the auditor's role and to

communicate the planning and end result of the audit. The auditing standards changed certain

elements of auditor communication with those charged with governance (TCWG), primarily the

Board of Education. The primary changes the board will see as a result will be as follows:

Revised format to the financial statement opinion letter, including emphasis of matter

paragraphs for accounting changes in the current year. Additionally, headings have been

added to the letter to draw attention to salient points for the board.

Revised pre-audit planning communication which more clearly delineate the risks identified

by the auditor for the current year assignment

Revised format to the federal program compliance letters, again including headings for better

understanding of certain elements of the audit



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Overall, the audit process did not change substantially, but the look of certain documents the

board is accustomed to reviewing has changed and should be read carefully in the year-end

process.

Changes in the School Bond Loan Fund (SBLF)

The School Bond Loan Fund was included in the Michigan Constitution and was designed to

relieve tax burden, accommodate growth, and address serious school infrastructure needs.

Public Act 437, signed into law on December 28, 2012, made substantial changes to how this

program functions. These changes impact how the program will operate, the degree to which

an eligible district will be able to participate, and the tax burden that will be transferred to the

taxpayers of the participating district. The elements of the new law are complex and will

require significant planning and management by a participating district. Key implications of the

new law include:

The computed debt millage levied will likely fluctuate from year to year as the rate levied

must be set so the district will pay off the borrowing by the Mandatory Loan Repayment

Date (MLRD). Millage rates could fluctuate between 7 and 13 mills.

To participate, schools will continue to go through a prequalification process but some of the

requirements to participate have been modified. The most significant one relates to the fact

the State has capped the total program at $1.8 billion, meaning that if the statewide total

outstanding SBLF debt reaches that amount, districts otherwise qualifying for the program

will not be able to participate. It is expected the State will reach this limit within as little as

two years.

Payment projections must show that the Agency will be able to retire the SBLF debt within

72 months after the bonds fully mature.

The repayment provisions of the new law apply to current SBLF borrowings as well as new

borrowings.

Many districts have leveraged benefits of the SBLF to make infrastructure improvements by

spreading the revenue received to fund those improvements over the benefiting period. These

changes may limit the Agency’s ability to accomplish that goal as we move into the future. As a

result, the Agency should work with its bond counsel to carefully review the potential

implications of these changes before deciding to participate in the SBLF. Additionally,

communication may be needed with the community since debt mills may need to increase to

comply with the new law.