Financial exigency rules limit district flexibility when funds are tight

The Texas Education Agency (TEA) recently posted long-anticipated emergency rules regarding when a school district may declare financial exigency. The rule, which became effective on Nov. 21, 2011, and will remain in effect for a minimum of four months, effectively limits the ability of school districts to manage their resources in the event of financial circumstances that are out of their control.

The commissioner of education developed the rule in accordance with S.B. 8, which called for the adoption of minimum standards with regard to the financial conditions that must exist in a district in order for the school board to declare financial exigency.

The rule defines financial exigency as: the financial position of a school district as a whole is such that the financial resources of the school district are insufficient to support existing academic programs or the school districts is unable to finance the full compensation of staff for the current or succeeding fiscal year.

Under the rule, districts must be experiencing one or more of the following conditions before a school board can declare financial exigency:

• A decrease of more than 20 percent in a district’s unassigned General Fund balance per student in weighted average daily attendance over the past two years or a projected reduction of 20 percent compared to the current year;
• A decline in enrollment by more than 10 percent over the past 5 years;
• A reduction of more than 10 percent in total General Fund total funding per student in weighted average daily attendance or a projected reduction of 10 percent compared to the current year;
• An unforeseen natural disaster requiring significant expenditures for repair or remediation in excess of 15 percent of the current year General Fund budget;
• An unanticipated major expense, including significant repair costs; litigation expenses, excluding lawsuits against the state; or tax refunds in excess of 15 percent of the current year General Fund budget; or
• Any other circumstances approved in writing by the commissioner of education.

Prior to this rule, it was up to school boards to determine whether their financial conditions were severe enough to declare a financial exigency and carry out a reduction in force. There were no specific guidelines that school boards had to follow.

TASB Associate Executive Director for Governmental Relations Jackie Lain noted that the new rules focus solely on year-to-year funding losses without looking at the cumulative loss of funds over time. “…If a district has a 6 percent drop three years in a row, we know from experience that such a loss is financially devastating. Yet, it would not qualify as a financial exigency under these standards,” Lain said.

Districts experienced state funding cuts of 6 percent this year and many districts anticipate cuts of up to 8 or 9 percent next year (compared to 2010-11 funding levels). Yet, the rule requires a 10 percent annual loss threshold to declare financial exigency. “These rules will render useless some of the managerial flexibilities authorized by the legislature,” Lain said.

The rules do permit the commissioner to use his discretion to permit a financial exigency declaration when a district fails to meet any of the specified thresholds. “How the commissioner uses that discretion will determine whether these rules are appropriately or unnecessarily restrictive,” Lain said.

TEA is expected to post a permanent version of the rules on Dec. 9, triggering a 30-day period for public comments.