Bd 3-9-2010

SAN MARINO UNIFIED SCHOOL DISTRICT

BUSINESS SERVICES

MEMORANDUM

To: Dr. Gary Woods, Superintendent

Submitted by: Julie Boucher, Assistant Superintendent, Business Services

Prepared by: Vangie Lingat, Director of Accounting

Date: March 9, 2010

Subject: 2009-10 SECOND INTERIM FINANCIAL REPORT AND

LONG-RANGE FINANCIAL PROJECTION

The 2009-10 Second Interim Financial Report and the Long-Range

Financial Projection “Second Interim” are presented to the Board of

Education for review, discussion and approval. It is recommended that the

Board of Education certify (a “Positive Certification”) that the District

will be able to meet its financial obligations for the current year 2009-10

as well as the subsequent two fiscal years (2010-11, and 2011-12) based

on the following certification statement:

In certifying the Second Interim, the Board of Education understands its

fiduciary responsibility to maintain the District’s fiscal solvency and to

submit a balanced budget for the current year 2009-10, and the two

subsequent fiscal years 2010-11, and 2011-12. It is recognized that the

projected $20 billion State budget deficit (as of January 2010 – subject to

revision) will most likely result in additional reductions and deferrals of

K-12 Education funding. The Board of Education has taken action and will

continue to consider further actions to balance its budget in 2009-10 and to

address the projected budget deficits in fiscal years 2010-11 and 2011-12.

Executive Summary

The District is required under AB 1200 (Chapter 1213/1991) and Education Code Section

35035 to submit two interim financial reports during each fiscal year to the Los Angeles

County Office of Education and to the California Department of Education (CDE). These

laws require county offices and the CDE to closely monitor and review school district

budgets and financial projections.

The State Plan approved by the Governor on July 28, 2009, resulted in the additional

reductions in K-12 Education “Education” funding for 2009-10 after adoption of the

District’s Budget on June 23, 2009. As a result of the State Plan, the District faced an

additional $1 million deficit for the current year, which was bridged by one-time savings,

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March 9, 2010

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reductions, and contributions. Although the Second Interim financial reports and

projections reflect that the District will be able to meet its financial obligations, it is

because identified savings, the sweep and transfer of categorical funding to the

Unrestricted General Fund, and potential budget reductions have been included. The Los

Angeles County Office of Education has warned local school districts that, “These are

extraordinary and difficult economic times. Gauging what will happen is at a very high

degree of uncertainty and the consequences will be most significant.”

Second Interim Financial Reports

The information presented in this report includes actual and projected financial

information for the Unrestricted and Restricted General Fund as of January 31, 2010.

The columns in the detailed Second Interim financial reports represent the following:

Column A (Original Budget) is the 2009-10 Adopted Budget approved by the

Board of Education as of July 1, 2009.

Column B (Board Approved Operating Budget) is the Operating Budget approved

by the Board of Education on January 26, 2010. The Operating Budget includes

budget adjustments approved by the Board of Education since the Adopted

Budget on July 1, 2009.

Column C (Actuals to Date) is the actual revenues received and expenditures

incurred and other transfers as of January 31, 2010.

Column D (Projected Year Totals) is the total projected revenues and

expenditures also categorized by revenue source and major expenditure object

code for the 2009-10 fiscal year.

Column E (Difference) is the variance amount between the Board-approved

Operating Budget (Column B) and the Projected Year Totals (Column D). The

differences in District revenues reflected in the report represent adjustments to

state, federal and local revenues, as well as adjustments in expenditure categories.

Student Enrollment

Total student enrollment, including regular and special education, is projected at 3,230

for 2009-10, which is nearly the same as the prior year (3,227).

Revenue Limit Average Daily Attendance/Funding

The District's 2009-10 average daily attendance (ADA) for revenue limit calculation

purposes “RL ADA” is projected at 3,145.36. In future years, it is projected that the

District’s RL ADA will decrease based on larger graduating classes and fewer students

entering school at the lower grade levels. The District will receive $4,962.25 in net

revenue limit funding per student for 2009-10, the equivalent of $27.57 per student per

instructional day (a total of 180 days).

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March 9, 2010

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Cost-of-Living Adjustment

Although the statutory Cost-of-Living Adjustment “COLA” for 2009-10 is 4.25%, based

on the State Budget, a deficit factor of 18.355% was applied, which resulted in a net loss

of revenue limit funding. Additional revenue limit of $252.83 per ADA was also applied

further reducing the District’s revenue limit funding.

Revenues

Total District revenues are projected at $29.5 million (rounded) for the 2009-10 fiscal

year. Sources of the District’s revenue include RL ADA funding, other State, federal, and

local categorical funding, lottery funds, parcel tax revenues, facility use income,

contributions from the San Marino School Foundation, and donations from

PTA’s/PTSA’s, PTAffiliates and parents. The increase in revenues from the Adopted

Budget is due to the receipt of additional ARRA funds as well as contributions and

donations.

Federal Funding

Under the federal American Recovery and Reinvestment Act (ARRA) California school

districts were allocated one-time funds including State Fiscal Stability Funds (SFSF) and

ARRA funding for special education and ROP. The ARRA/SFSF funding that has been

received to-date is included in the current fiscal year. Because the State cut K-12

Education more than twice the amount that schools received, the ARRA/SFSF funds were

used to offset the reductions in State revenues.

Lottery

Lottery funds, which represent 1.09% of the District’s total revenues, are currently

projected at $320,099, of which $41,973 is allocated to school sites for State-adopted

instructional materials.

Expenditures Total District expenditures are projected at $28.8 million (rounded) for the 2009-10 fiscal

year, of which $23.3 million or 81% represents salaries and benefits for instructional and

instructional support personnel. The increase in expenditures from the Adopted Budget is

due to the budgeting of prior-year carryover of restricted funds for materials, services and

equipment. Certificated and classified salaries as well as benefits changed only slightly

from the Adopted Budget. The changes are due to budget reconciliation and updates

based on staffing adjustments since the Adopted Budget.

Indirect Cost

Indirect cost is the percentage that restricted programs contribute to the Unrestricted

General Fund for central services and support. The Second Interim includes $31,185 in

indirect cost from the Food Services Fund for 2009-10.

Tax Revenue Anticipatory Notes (TRANS)

The District is a participant in the Cal-Ed TRANS pool. In the current year, the District

borrowed $4.6 million to help maintain its cash flow throughout the fiscal year. The funds

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were deposited with the Los Angeles County Treasurer into the District’s account. The

TRANS funds must be repaid in April 2010.

Cash Flow Projection

Included with the Second Interim financial reports is a projected cash flow statement for

the 2009-10 fiscal year. The District’s cash flow projection is projected to remain positive

through the end of the 2009-10 fiscal year due to: 1) the borrowing of $4.6 million

TRANS funding, and 2) inter-fund borrowing from the District’s Cash Flow Fund to the

Unrestricted General Fund.

Categorical Program Funding

No COLA was received for categorical programs. Nearly all of categorical funding was

swept and transferred to the Unrestricted General Fund in 2009-10.

Special Education

For 2009-10 the District will receive $2.7 million from State and federal sources for

special education, $541,000 of this amount is for one-time ARRA funds. Total

expenditures for special education are projected at $5 million, resulting in a $2.3 million

encroachment or contribution from the General Fund for special education instructional

and support salaries, benefits and services.

Net Increase/Decrease in Fund Balance

The District’s Budget reflects a decrease in the fund balance due to the planned spend-

down of the beginning balance funds, which include prior-year carryover of restricted

funds.

2009-10 Additional Deficit

The District additional deficit of $1 million in the current year was resolved with

identified savings, mid-year budget reductions, including one-time donations from the

San Marino Schools Foundation, reimbursement from parents for lost ADA, mid-year

certificated and classified resignations and retirements, additional reductions in materials,

services, conferences and repair budgets.

Ending Balance/Reserve for Economic Uncertainties

The District’s total ending balance for 2009-10 is projected at $1.064 million, which

includes a 3% reserve for economic uncertainties, stores, and revolving cash. The

decrease in the ending balance is due to the planned spend-down of prior-year restricted

funds, including restricted carry-over, deficit differential funds, and funds designated for

the Cash Flow Fund.

Status of Negotiations

The District settled a three-year agreement in November 2008 with both the San Marino

Teachers Association (SMTA) and the California School Employees Union Chapter #120

(CSEA). The agreements included a formula for salary adjustments based on “the

percentage increase in the funded base revenue limit per unit of ADA for that year minus

one percent (1%).” For 2009-10, the salary formula resulted in no salary increases, other

than step and column adjustments for SMTA employees. CSEA, management,

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administrative and non-represented employee groups agreed to a freeze of their step

increases, and two to three less paid holidays depending on the number of months worked

in lieu of additional reductions of personnel within their respective units. The agreements

for benefits included increases in employee contributions for health benefits. Employees

now pay 10% of cost of employee-only medical coverage, and 30% of the cost for

dependent coverage.

Other District Funds

As part of the Second Interim Financial Report, information and projections on each of

the District’s “Other Funds” is provided.

Food Services Fund 13.0

The Food Services Fund is a fully self-supporting fund and program. The Food Services

Fund covers all costs associated with the program including food services salaries and

benefits, food and supplies, repairs, equipment replacement, and indirect costs totaling

$31,185 for 2009-10.

Deferred Maintenance Fund 14.0

The Deferred Maintenance Fund supports major maintenance and repairs of the District’s

school sites. The District has a five-year plan of deferred maintenance needs, which has

been approved by the Office of Public School Construction. As part of the District’s Bond

Projects (new construction and modernization program 1998 – 2006) the District made a

commitment to the community that it would properly maintain its facilities. Deferred

maintenance funding, which up to now has been matched by the State, provides the

District with funding to support this effort.

Health & Welfare Reserve Fund 17.0

All funds in the Health & Welfare Reserve Fund were used to offset increases in

employee health and welfare premium costs for 2009-10.

Cash Flow Fund 17.2

The Cash Flow Fund was established as a result of the State’s reduction and the

permanent deferral of over $8 billion in K-12 Education apportionments from the current

year, 2009-10 to the next fiscal year, 2010-11. Over $4.5 million of the District’s funding

was deferred. Inter-fund borrowing from the Cash Flow Fund has provided the District

with the necessary funding to meet its monthly payroll and expenditure obligations during

the current year. Additional deferrals are anticipated as the State finds ways to resolve its

looming deficit. If this is the case, an amount equal to the deferred funding would need to

be set-aside in the Cash Flow Fund to enable the District to continue to meet its monthly

payroll and expenditure obligations.

Building Fund 21.0 (Bond Projects)

This fund accounts for the revenues and expenditures associated with the District's

modernization projects funded by the General Obligation Bonds Series 1996A & 1998A

($34.33 million) and Series 2000A ($18 million). All funds have been encumbered for

outstanding payments associated with completed projects.

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Capital Facilities Fund 25.0 (Developer Fees)

The Capital Facilities Fund accounts for income and expenditures associated with the

collection of developer fees. Developer Fees are restricted for capital needs.

Capital Projects and Improvement Fund 40.0

The Capital Projects and Improvement Fund accounts for restricted funding received for

facility improvement projects.

Bond Interest and Redemption Fund 51.0

The Bond Interest and Redemption Fund accounts for the proceeds from tax revenues and

payment of principal and interest to bondholders associated with the District’s issuance of

General Obligation Bonds “GO Bonds” in 1996, 1998, and 2000, as well as the 2001

refunding of the 1996 issuance.

Governor’s Proposed Budget 2010-11 The Governor presented his Proposed Budget for 2010-11 in January, with information

on revenue projections for the remainder of the current fiscal year, and projections for

2010-11. The Governor’s Budget, totaling $86 billion, projects a $20 billion deficit or

22% of the State’s total budget. The State’s tax revenues became inflated during the

“dot.com” and “housing and investment” booms. The majority of these revenues were

generated by the top 1% of wage earners in the State. The enhanced revenues were

allocated and used for all areas of government services, including education, health and

human services, transportation, State government and prisons.

Since 2008, the beginning of the “The Great Recession,” State revenues have dropped to

their lowest level in decades. At the same time, the cost of government services has

continued to increase. Hence, the “perfect economic storm” rages on. Not only are

revenues at their lowest level, but the demand for government services, particularly in

health and social services, have reached their highest level in decades as a result of high

unemployment, the housing bust, the decline in personal income, and the drop in overall

State tax revenues.

The Governor’s Proposed Budget assumes nearly $10 billion in federal funding to close

the State’s budget gap in 2010-11. If the funding does not materialize, the Governor plans

to enact “trigger reductions” which have not been defined nor detailed at this point in

time. Experts agree that it is unlikely that the federal government will appropriate an

additional $10 billion of funding for California, when other states are facing similar

circumstances and deficits.

A Special Session of the Legislature was called in December to address the current years’

deficit of $6 billion. Last week, the Senate and Assembly approved and sent to the

Governor three bills. AB8X 14 modifies the apportionment deferrals and certification

requirements. AB8X 6 and AB8X 9 are two bills related to the gas and excise taxes. The

Governor is expected to sign the bills.

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March 9, 2010

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In terms of K-12 Education funding, despite the fact that the Governor stated that he

plans to “protect” Education, his budget includes $1.2 billion of reductions to K-12

Education funding, as well as notation that K-12 Education is over-appropriated (a fancy

term for “over-funded”) by $2.4 billion in 2010-11. The combined total of the reductions

and “over-appropriation” of $3.6 billion is equal to approximately $600 per student. K-12

Education funding has already been reduced by over $1,800 per student. The justification

for the “over-appropriation” is that K-12 Education (Proposition 98) revenues are tied to

the rise or fall of State revenues. Since State revenues have declined even further, the

State has justified the corresponding reduction in K-12 Education funding for 2010-11.

Experts predict that the proposed reductions in K-12 Education funding are inevitable

without additional tax increases or other revenue adjustments.

Long Range Financial Projection Assumptions

The Long Range Financial Projection “LRFP” assumptions are based on the Governor’s

Proposed Budget and additional “trigger reductions” in K-12 Education funding.

� Statutory Cost-of-Living Adjustment (COLA) and Deficit Factors: The statutory

COLA, which is calculated based on the gross domestic product price deflator for

purchases made by state and local governments, will be confirmed in April for the

2010-11 fiscal year. The Governor’s Proposed Budget includes a negative 0.38%

COLA for 2010-11.

� A deficit factor of 18.355% has been included in the revenue limit calculations for

the projected years, as well as $600/ADA or approximately 10% reduction in RL

ADA. Projections for Other State revenues are projected to decline by an

additional 15% in 2010-11.

2009-10 2010-11* 2011-12*

Statutory COLA 4.25% -0.38%

1.80%

Revenue Limit Deficit Factor 18.355% 18.355% 18.355%

Additional Deficit/per ADA $252.83/ADA $250/ADA $250/ADA

Additional Deficit/per ADA $350/ADA $350/ADA

Special Ed COLA 4.25% -0.38% 1.80%

Categorical COLA Tier I 0.00% Varies 1.80%

Categorical COLA Tiers II & III -4.46% -0.38% 1.80%

Additional Categorical Deficit - 15% 15%

• Projected – subject to change.

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March 9, 2010

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� Enrollment/Revenue Limit ADA: For budget planning purposes, a conservative

approach was used for student enrollment and revenue limit ADA projections for

2010-11 and 2011-12. All grade levels were moved up, total kindergarten

enrollment was projected at a total of 120 students, and enrollment was reduced

by 10 students in grades 6 and 9.

� Below is a brief history of the District’s CBEDS enrollment and revenue limit

ADA and the figures used for projection purposes. The enrollment and RL ADA

projections are conservative and do not account for additional students that may

move into or transfer into the District in the projected years.

Student Enrollment and Revenue Limit ADA - Actual and Projected

2006-07 2007-08 2008-09 2009-10 2010-11* 2011-12*

CBEDS

Enrollment

(Oct. 2009) 3,242 3,199 3,227 3,230 3,048 2,868

Enrollment

Difference -40 -43 +28 +3 -182 -180

RL ADA 3,208 3,197 3,147 3,145 3,134** 2958**

RL ADA

Difference -36 -11 -50 -3 -11 -176

*Projected years

**Based on prior year P2 cumulative ADA. The State funds revenue limit based on

current year or prior year P2 cumulative ADA, whichever is higher.

For our District to receive additional RL ADA, total student enrollment would

need to increase above 3,230.

� Step and Column Adjustments: Projected step and column for those employees

who earn additional service credit or educational units have been included in the

projected years. As part of the approved budget reductions for 2009-10, step

increases for CSEA and management and administrative employees were frozen.

Step and column adjustments for the projected years are subject to change based

on ongoing discussions and negotiations.

� Salary Compensation Adjustments: No salary increases are included in the

projected years.

� Staffing Levels: Future year projections include an overall reduction in

certificated and classified staffing levels due to the loss of State funding and

required increases in expenditure categories.

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� Health Benefit Costs: A projected increase of $500,000 per year has been included

in the 2010-11 and 2011-12 projection for health benefit cost increases. Unless

plan adjustments are agreed upon, health benefits will increase by 28.8% for Blue

Cross PPO, 15% for Blue Cross HMO, and 11.88% for Kaiser HMO in 2010-11.

Currently, all benefit-eligible employees pay 10% of the cost of employee-only

medical benefits, and 30% of the cost of dependent coverage for medical benefits.

The District pays 90% of employee-only medical coverage, 70% of dependent

care medical coverage, and 100% of vision, dental, life and behavioral health

insurance costs for benefit-eligible employees.

� STRS and PERS Costs: Both of the State retirement programs for public

employees incurred significant losses as a result of the financial crisis. STRS and

PERS portfolio losses have been reported to be as much as 25%. Public entities,

including local school districts, have been advised that increases in STRS and

PERS contributions are forthcoming to address the retirement systems’ losses.

Currently, the District pays 8.25% to STRS for eligible certificated personnel and

13.02% for eligible classified personnel for PERS. correspondingly, employees

pay 8% for STRS and 7% for PERS. There is a possibility that employer

contributions for 2011-12 and beyond may be increased, given the State’s

financial condition and outlook.

� Materials, Services and Equipment: Future year projections include an overall

reduction in instructional material, supplies, operating services, with the exception

of utility costs which are anticipated to increase by $100,000 per year, special

education non-public school costs to increase by $150,000 per year, and election

costs in 2011-12.

� Facility Use Fees: Neither use of facility fee revenues, nor any lease revenue for

the Stoneman Site are included in the projected years. The agreements are year-to-

year and future year revenues are uncertain.

� San Marino Schools Foundation Annual Contribution: It is projected that the

District will continue to receive $1 million annually from the San Marino Schools

Foundation Annual Campaign.

� Parcel Tax Revenues: It is projected that the District will receive $4.5 million in

parcel tax revenues based on Measures R and E in 2010-11 and 2011-12.

� Federal ARRA/SFSF Revenues – No additional ARRA/SFSF funding is included

in the projections.

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March 9, 2010

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2010-11 Projected Budget Deficit/Potential Budget Reductions

Based on the assumptions included in the Second Interim and the LRFP, the District’s

budget gap for 2010-11 is currently projected at $5 million. This figure is subject to

change based on various factors including actual State funding, RL ADA, other revenue

sources, budget reductions, concessions, etc.

As part of the Second Interim and LRFP, the Los Angeles County Office of Education

requires that the District submit a financial plan to address the anticipated loss of State

revenues in future years. Potential budget reductions have been included in the LRFP.

On February 9th, and as amended on February 23rd, the Board of Education adopted

Resolution #8 “Resolution of intention to reduce or eliminate particular services and

dismiss affected certificated employees,” which includes 47.90 certificated FTE and is

equal to approximately $3.5 million in savings. Additional budget reductions will be

necessary to balance the budgets for 2010-11 and 2011-12 projection. Additional

concessions from classified CSEA, management, administrative and non-represented

employees are being finalized as of the writing of this report, and the Board will be

considering additional expenditure reductions prior to adoption of the 2010-11 District

Budget.

2011-12 Projections

Based on the LRFP assumptions, it is projected that the District will face an additional

$1.34 million budget deficit in 2011-12. The projected deficit amount is subject to change

based on various budget factors and actual State revenues. Potential budget reductions are

included in the LRFP for 2011-12.

Next Steps

The District will continue to closely monitor the State’s fiscal situation and its impact on

K-12 Education funding. The Board of Education has appointed a fiscal stability task

force to develop a long-range financial stability plan for the District.

Unless additional funding is identified, budget reductions will be implemented to balance

the District’s budget in years 2010-11 and 2011-12. As additional information is received

from the State, updates will be provided.