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PROPOSED RULEMAKING

STATE BOARD OF EDUCATION

[ 22 PA. CODE CH. 18 ]

Financial Recovery

[44 Pa.B. 4514]
[Saturday, July 19, 2014]

 The State Board of Education (Board) proposed to add Chapter 18 (relating to financial recovery) to read as set forth in Annex A. The Board is acting under the authority of section 621-A(a)(2)(i) of the Public School Code of 1949 (School Code) (24 P. S. § 6-621-A(a)(2)(i)).

Purpose

 This proposed rulemaking establishes criteria the Secretary of Education (Secretary) may consider in determining whether to place a school district in financial recovery status and provides guidance to the Secretary in determining whether a district would be deemed in either moderate or severe recovery status.

Background

 The act of July 12, 2012 (P. L. 1142, No. 141) (Act 141) added section 621-A(a)(2)(i) of the School Code, which identifies 15 criteria the Secretary may consider in determining whether to issue a declaration that a school district is in financial recovery status. Section 621-A of the School Code also directs the Board to promulgate regulations that establish additional criteria the Secretary may consider in determining whether to issue a declaration of financial recovery status and whether a financial recovery school district should be deemed in either moderate or severe recovery status.

 In promulgating the regulations mandated by Act 141, the Board was required under section 621-A(a)(2)(ii)(A) of the School Code to convene and consult with a Statewide Advisory Committee comprised of representatives of the Department of Education (Department), the Governor's Office of the Budget, and a superintendent, school board member and school business official representative of urban, rural and suburban school districts. The Advisory Committee convened four times throughout 2012 to develop a draft proposed regulation for the Board's consideration. Advisory Committee meetings were open to the public and public comment was invited at each convening.

 From its first meeting on September 6, 2012, through the conclusion of its deliberations on December 6, 2012, the Advisory Committee worked in conjunction with the Board's Standing Committee on Financial Recovery. The full Board was kept abreast of the Advisory Committee's work through regular reports the chairperson made during the Board's bimonthly public meetings.

 In the early stages of its deliberations, the Advisory Committee reviewed its statutory charge and received a presentation on Act 141 so that Advisory Committee members had a comprehensive understanding of how their work fit into the broader system of supports for struggling school districts established by the General Assembly. This included receiving a presentation on the new Early Warning System developed by the Department to identify districts that show indications of financial challenges and provide them with technical assistance early on in the hopes that their challenges may be addressed before a declaration of financial recovery status would become necessary.

 In the next stage of its deliberations, the Advisory Committee reviewed approaches used by other states to identify school districts facing financial challenges and discussed whether criteria used by those states were factors that should be included in the Board's regulations. In total, the Advisory Committee reviewed relevant policies in Michigan, California, Texas, Florida, Arizona and Illinois. The Advisory Committee also reviewed other Commonwealth laws concerning financially distressed entities to inform itself of the criteria used in other Commonwealth policies to classify distressed local governments.

 Upon receiving the Advisory Committee's recommendation on Chapter 18, the Board's Standing Committee on Financial Recovery (Standing Committee) held a public meeting on January 9, 2013, and adopted amendments to further refine areas where the Standing Committee felt the Advisory Committee's recommendation needed greater clarity. Proposed Chapter 18, as approved by the Standing Committee, was then presented for additional comment to both the Board's Council of Basic Education (Council) at its public meeting on January 9, 2013, and the full Board at its public meeting on January 10, 2013. Both the Council and the Board provided an opportunity for public comment prior to approval of the proposed regulation.

 Subsequently, the Board withdrew its proposed rulemaking to engage in continued discussion of the criteria identified for the Secretary's consideration. On November 14, 2013, the Board discussed and approved a revised rulemaking that removed criteria that were identified as being duplicative and, therefore, unnecessary. An additional opportunity for public comment was made available prior to the Board's consideration of the revised proposed rulemaking at its public meeting on November 14, 2013.

Provisions of the Proposed Rulemaking

 Proposed Chapter 18 addresses the requirements in section 621-A(a)(2)(i) of the School Code.

Issuance of declaration

 Sections 18.4 and 18.5 (relating to issuance of declaration under section 621-A(a)(1) of the School Code; and issuance of declaration under section 621-A(a)(2) of the School Code) address the issuance of a declaration of financial recovery status.

 Section 18.4 reflects statutory criteria that require the Secretary to place a school district in financial recovery status and is included in the proposed regulations for completeness. The section also contains, again for completeness, statutory provisions that allow the Secretary to decline to issue a declaration of financial recovery status to districts that meet the criteria established in section 621-A(a)(1) of the School Code if the circumstances facing a district were caused by an emergency that occurred within the past 5 years and that prohibit a district from being placed under a declaration if its financial circumstances were caused by the failure of the Commonwealth to make timely payments of State or Federal funds due to the district.

 Section 18.5 establishes criteria the Secretary may consider in determining whether to issue a declaration that a school district is in financial recovery status. Section 621-A(a)(2) of the School Code identifies 15 criteria that the Secretary may consider in deciding whether to issue a declaration. Those 15 statutory criteria are included for completeness and are reflected in § 18.5(a)(1)—(6), (9)—(16) and (18).

 The Board is proposing three additional criteria for the Secretary's consideration in determining whether to issue a declaration of financial recovery status.

 The Board is proposing to include the criteria in § 18.5(a)(7) and (8) because they are conceptually congruent to the criteria identified in section 621-A(a)(2)(i)(F) of the School Code. This statutory criteria is reflected in § 18.5(a)(6). Section 18.5(a)(6) directs the Secretary to consider whether a district is subject to withholding of State appropriations because the district met statutory thresholds that allow for withholding due to missed bond payments. The Board is proposing that the Secretary take into consideration whether a district is subject to withholding of State appropriations because the district met other statutory thresholds that allow for withholding either due to missed payments to the State Public School Building Authority or missed SWAP payments.

 The Board is proposing criterion in § 18.5(a)(17) as a means for the Secretary to assess districts facing a deficit situation by directing the Secretary to examine whether a district is experiencing a deficit of 3% or more for 3 consecutive years that results in an annual reduction of the district's unassigned fund balance. The Board recognizes that there are circumstances when deficit spending may be appropriate, including situations when a district is tapping its fund balance to meet pension obligations or to avoid increasing taxes. To address the use of fund balance in these circumstances, the Board focused the proposed criterion on comparing a district's deficit only to reductions in a district's unassigned fund balance, recognizing that these appropriate uses of fund balance should have a dedicated purpose and not fall into the category of unassigned expenditures. Further, the Board crafted the criterion to look only at deficits of 3% or more that continue for 3 consecutive years to avoid identifying districts that are experiencing short-term circumstances that result in a deficit situation. The proposed regulation also includes a safeguard for districts experiencing circumstances outside of their control from being identified for a declaration of recovery status by including a provision in § 18.5(c) that would allow the Secretary to decline to issue a declaration if a district's challenges were caused by an emergency. This provision could prevent identification of districts that may need to tap unassigned fund balance to address extenuating circumstances.

 Section 621-A(b) of the School Code prohibits the Secretary from placing a school district in financial recovery status if the circumstances facing a district were caused by the failure of the Commonwealth to remit timely payments of State or Federal funds owed to the district. This statutory limitation is included in § 18.5(b) for completeness.

 Section 621-A(a)(1)(ii)(B) of the School Code grants the Secretary the discretion to decline to issue a declaration of financial recovery status to districts subject to a designation by section 621-A(a)(1) of the School Code if the Secretary determines that the circumstances facing a district were caused by an emergency that occurred within the past 5 years. The Board is proposing to extend this provision to districts potentially subject to a declaration of financial recovery status under § 18.5(c) to grant the Secretary discretion to decline to issue a declaration of financial recovery status in all situations when the circumstances facing a district were caused by an emergency that occurred within the past 5 years.

 The Board is proposing in § 18.5(d) to require the Secretary to identify which criteria were used as the basis for issuing a declaration of financial recovery status when making a declaration.

Limitations

 Section 621-A(a)(1)(ii)(A) of the School Code limits the number of school districts that may be in either financial recovery status or receivership at any one time to nine. This statutory limitation is included in § 18.6(a) (relating to limitation) for completeness.

 The Board is of the opinion that declarations of financial recovery status should be based on the most current information available to the Secretary. To provide guidance to the Secretary in executing decisions based on the criteria proposed in § 18.5(a), the Board is proposing in § 18.6(b) that the Secretary not use information related to the criteria that is more than 5 years old. The Board is proposing a 5-year period based on section 621-A(a)(1) of the School Code, which allows the Secretary to consider a 5-year period in determining whether circumstances facing a district were caused by an emergency.

Moderate and severe recovery status

 Section 18.7 (relating to moderate and severe recovery status) would provide guidance to the Secretary in determining whether a financial recovery school district will be deemed in either moderate recovery status or severe recovery status. The Board is proposing that the decisions be guided by whether a district is unable, or is reasonably unlikely to be able, to access enough revenue to complete the current school year or to fulfill the required amount of instruction to complete the forthcoming school year. The proposed regulations would guide the Secretary to issue a declaration of severe recovery status to districts that would not be able to access enough revenue to complete the required instruction.

Appeal

 Section 621-A(c) of the School Code provides for declarations of financial recovery status to be subject to appeal under 2 Pa.C.S. §§ 501—508 and 701—704 (relating to Administrative Agency Law) and is included in § 18.8 (relating to appeal) for completeness.

Affected Parties

 The proposed rulemaking would guide the decision making of the Secretary and affect work of the Department's staff.

Cost and Paperwork Estimates

 The proposed rulemaking establishes responsibilities for the Secretary and staff of the Department to collect and analyze information, as well as to support certain legal procedures. State government incurred one-time costs of $75,000 in Fiscal Year 2012-2013 to develop, populate and reconcile models to be used by the Department for information collected relevant to the Department's Early Warning System and criteria identified in the proposed rulemaking.

 Beginning in the current fiscal year, the Department estimates it would incur an annual cost of $549,080 to support staffing necessary to carry out the requirements of the proposed rulemaking. Specifically, the Department anticipates the following implementation costs: $399,500 to annually support one to two full-time equivalent employees, plus outside counsel, to undertake legal procedures associated with opinions, declarations, appeals, petitions, contracts and challenges; $72,500 to annually support one full-time equivalent staff to coordinate and consolidate information, communications and procurement; and $77,080 to support staffing to conduct preliminary reviews, request and review information, produce summary reports and provide expert advice to the Department.

Effective Date

 The proposed rulemaking will be effective upon final-form publication in the Pennsylvania Bulletin.

Sunset Date

 The Board will review the effectiveness of Chapter 18 every 4 years in accordance with the Board's policy and practice respecting its regulations. Therefore, a sunset date is not necessary.

Regulatory Review

 Under section 5(a) of the Regulatory Review Act (71 P. S. § 745.5(a)), on July 8, 2014, the Board submitted a copy of this proposed rulemaking and a copy of a Regulatory Analysis Form to the Independent Regulatory Review Commission (IRRC) and to the Chairpersons of the House and Senate Committees on Education. A copy of this material is available to the public upon request.

 Under section 5(g) of the Regulatory Review Act, IRRC may convey any comments, recommendations or objections to the proposed rulemaking within 30 days of the close of the public comment period. The comments, recommendations or objections must specify the regulatory review criteria which have not been met. The Regulatory Review Act specifies detailed procedures for review, prior to final publication of the rulemaking, by the Board, the General Assembly and the Governor of comments, recommendations or objections raised.

Public Comments and Contact Person

 Interested persons and individuals affiliated with small businesses are invited to submit written comments, questions, suggestions, commendations, concerns or objections regarding this proposed rulemaking to Karen Molchanow, Executive Director, State Board of Education, 333 Market Street, Harrisburg, PA 17126, ra-stateboardofed@pa.gov. Comments must be submitted to Board within 30 days of publication of this notice of proposed rulemaking in the Pennsylvania Bulletin.

 Persons with disabilities needing an alternative means of providing public comment may make arrangements by calling Karen Molchanow at (717) 787-3787 or TDD (717) 787-7367.

KAREN MOLCHANOW, 
Executive Director

Fiscal Note: 6-329. (1) General Fund; (2) Implementing Year 2012-13 is $75,000; (3) 1st Succeeding Year 2013-14 is $549,000; 2nd Succeeding Year 2014-15 is $549,000; 3rd Succeeding Year 2015-16 is $549,000; 4th Succeeding Year 2016-17 is $549,000; 5th Succeeding Year 2017-18 is $549,000; (4) 2012-13 Program—N/A; 2011-12 Program—N/A; 2010-11 Program—N/A; (7) Various; (8) recommends adoption. Funds have been included in the current and proposed budget to cover this increase.

Annex A

TITLE 22. EDUCATION

PART I. STATE BOARD OF EDUCATION

Subpart A. MISCELLANEOUS PROVISIONS

CHAPTER 18. FINANCIAL RECOVERY

Sec.

18.1.Statutory authority.
18.2.Purpose.
18.3.Definitions.
18.4.Issuance of declaration under section 621-A(a)(1) of the School Code.
18.5.Issuance of declaration under section 621-A(a)(2) of the School Code.
18.6.Limitation.
18.7.Moderate and severe recovery status.
18.8.Appeal.

§ 18.1. Statutory authority.

 The statutory authority for this chapter is section 621-A(a)(2) of the School Code (24 P. S. § 6-621-A(a)(2)).

§ 18.2. Purpose.

 Consistent with section 621-A(a)(2) of the School Code (24 P. S. § 6-621-A(a)(2)), the purpose of this chapter is to establish criteria that the Secretary may consider in determining whether to issue a declaration that a school district is in financial recovery status, and whether a school district in financial recovery status is in moderate or severe recovery status.

§ 18.3. Definitions.

 The following words and terms, when used in this chapter, have the following meanings, unless the context clearly indicates otherwise:

Average daily membership—The final average daily membership of a school district as most recently determined by the Department in accordance with procedures established by the Secretary under section 2501(3) of the School Code (24 P. S. § 25-2501(3)).

Claim—As defined by section 602-A of the School Code (24 P. S. § 6-602-A), a right to either of the following:

 (i) Payment, whether or not the right is reduced to judgment, liquidated, unliquidated, fixed, contingent, matured, unmatured, disputed, undisputed, legal, equitable, secured or unsecured.

 (ii) An equitable remedy for breach of performance if the breach gives rise to a right to payment, whether or not the right to an equitable remedy is reduced to judgment, fixed, contingent, matured, unmatured, disputed, undisputed, secured or unsecured.

Deficit—As defined by section 602-A of the School Code, the excess of expenditures over revenues, calculated as a percentage of revenue, during an accounting period, and which calculation includes all governmental fund types and all proprietary fund types, but excludes all fiduciary fund types of the school district.

Expenditures

 (i) As defined by section 602-A of the School Code, reductions in fund equity, including current operating expenses that require the use of fund equity, debt service and capital outlays.

 (ii) The term does not include interfund transfers.

Financial Recovery School District—As defined by section 602-A of the School Code, a school district declared by the Secretary to be in financial recovery status under section 621-A of the School Code (24 P. S. § 6-621-A).

Fixed costs—Expenditures for utility services, insurance—general, communications, energy and debt service as defined in the Manual of Accounting and Related Financial Procedures for Pennsylvania School Systems.

Fund equity

 (i) As defined by section 602-A of the School Code, excess of assets of a fund over its liabilities.

 (ii) The term includes a fund balance.

Revenues—As defined by section 602-A of the School Code, additions to fund equity other than from interfund transfers, proceeds of debt and proceeds of disposition of general fixed assets.

School Code—The Public School Code of 1949 (24 P. S. §§ 1-101—27-2702).

School district

 (i) As defined by section 602-A of the School Code, a school district of the first class A, second class, third class and fourth class and a Financial Recovery School District.

 (ii) The term does not include a school district of the first class.

Total annual expenditures

 (i) Reductions in fund equity (including current operating expenses that require the use of fund equity), debt service and capital outlays (including all governmental fund types and all proprietary fund types), excluding all fiduciary fund types of the school district.

 (ii) The term does not include interfund transfers.

Unassigned fund balance—Amounts available for any purpose within the general fund only as defined in the Manual of Accounting and Related Financial Procedures for Pennsylvania School Systems.

§ 18.4. Issuance of declaration under section 621-A(a)(1) of the School Code.

 (a) As provided by section 621-A(a)(1) of the School Code (24 P. S. § 6-621-A(a)(1)), the Secretary shall issue a declaration that a school district is in financial recovery status when either of the following applies:

 (1) The school district has an average daily membership over 7,500 and receives an advance of its basic education subsidy at any time.

 (2) The school district receives an advance of its basic education subsidy at any time and either of the following applies:

 (i) The school district is subject to a declaration of financial distress under section 691 of the School Code (24 P. S. § 6-691).

 (ii) The school district is engaged in litigation against the Commonwealth in which the school district seeks financial assistance from the Commonwealth to allow the school district to continue in operation.

 (b) As provided by section 621-A(a)(1)(ii)(B) of the School Code, the Secretary may decline to issue a declaration that a school district is in financial recovery status when the Secretary determines that the school district, within the previous 5 years, has faced an emergency that caused the occurrence of a circumstance in subsection (a).

 (c) As provided by section 621-A(b) of the School Code, a school district will not be declared in financial recovery status if the circumstances in subsection (a) have been caused by the failure of the Commonwealth to make a payment of money due to the school district at the time the payment is due, including payment of Federal funding that is distributed through the Commonwealth.

§ 18.5. Issuance of declaration under section 621-A(a)(2) of the School Code.

 (a) Consistent with section 621-A(a)(2)(i) of the School Code (24 P. S. § 6-621-A(a)(2)(i)), the Secretary may consider the following criteria when determining whether to issue a declaration that a school district is in financial recovery status:

 (1) The school district receives at least 85% of its per pupil funding from the Commonwealth and collects less than 50% of local taxes levied to fund the school district.

 (2) The school district's unreserved fund balance has declined for 3 consecutive years and is less than 5% of the school district's annual expenditures. As used in this paragraph, a school district's unreserved fund balance means the school district's unassigned fund balance.

 (3) The school district's fixed costs are at least 30% of the school district's total annual expenditures.

 (4) The school district's total outstanding debt is greater than the school district's total annual expenditures.

 (5) The salaries of teachers or other employees of the school district are unpaid at least 15 days after payment is due.

 (6) The school district is subject to withholding of its State appropriation under section 633 of the School Code (24 P. S. § 6-633).

 (7) The school district is subject to withholding of its State appropriation under section 785 of the School Code (24 P. S. § 7-785).

 (8) The school district is subject to withholding of its State appropriation under 53 Pa.C.S. § 8283(c) (relating to remedies).

 (9) The school district has defaulted on the payment of a debt due to a school district, intermediate unit or charter school that remains unpaid on or after January 1 of the year following the school year it was due and there is not a dispute regarding the validity or amount of the claim.

 (10) The school district's assigned and unassigned total fund balance is less than zero in the school district's general fund.

 (11) The school district's assigned and unassigned total fund balance in the school district's general fund as a percentage of total expenditures is less than 3%.

 (12) The school district experiences a delinquent tax rate of more than 10%.

 (13) The assessed valuation of taxable real estate in the school district, as certified by the State Tax Equalization Board, has not increased over the previous 5 years.

 (14) An amount due a joint board of school directors under a joint board agreement remains unpaid beyond the due date specific in the joint board's articles of agreement.

 (15) The school district has contracted a loan not authorized by law.

 (16) The school district has accumulated and operated with a deficit equal to at least 2% of the assessed valuation of the taxable real estate within the school district for 2 successive school years.

 (17) The school district experiences a deficit of 3% or more for 3 consecutive school years resulting in a reduction of unassigned fund balance each year.

 (18) A new, merged or union school district has been formed and one or more of the former school districts which compose the merger or union school district was a distressed school district under section 691 of the School Code (24 P. S. § 6-691) or a financial recovery school district under Article VI-A of the School Code (24 P. S. §§ 6-601-A—6-693-A) at the time of the formation of the new, merged or union school district.

 (b) As provided by section 621-A(b) of the School Code, a school district will not be declared in financial recovery status if the circumstances in subsection (a) have been caused by the failure of the Commonwealth to make a payment of money due to the school district at the time the payment is due, including payment of Federal funding that is distributed through the Commonwealth.

 (c) The Secretary may decline to issue a declaration that a school district is in financial recovery status when the Secretary determines that the school district, within the previous 5 years, has faced an emergency that caused the occurrence of a circumstance in subsection (a).

 (d) When the Secretary issues a declaration that a school district is in financial recovery status, the Secretary will specify the criteria in this section that placed the school district in financial recovery status.

§ 18.6. Limitation.

 (a) As provided by section 621-A(a)(1)(ii)(A) of the School Code (24 P. S. § 6-621-A(a)(1)(ii)(A)), no more than nine school districts may be under a declaration of financial recovery status or in receivership at any one time.

 (b) The Secretary may not use information that is more than 5 years old when considering criteria under § 18.5 (relating to issuance of declaration under section 621-A(a)(2) of the School Code).

§ 18.7. Moderate and severe recovery status.

 (a) Moderate recovery status. The Secretary shall issue a declaration that a Financial Recovery School District is in moderate recovery status if the Financial Recovery School District is not declared by the Secretary in severe recovery status.

 (b) Severe recovery status. The Secretary shall issue a declaration that a Financial Recovery School District is in severe recovery status if the financial conditions of the school district indicate that the school district is unable, or is reasonably unlikely to be able, to fulfill the 180 days of instruction for pupils requirement provided by section 1501 of the School Code (24 P. S. § 15-1501) for the present school year or for the following school year due to the lack of existing revenue sources and additional revenue sources as are provided by and allowed under law, including the Taxpayer Relief Act (53 P. S. §§ 6926.101—6926.5006).

§ 18.8. Appeal.

 As provided by section 621-A(c) of the School Code (24 P. S. § 6-621-A(c)), a school district may appeal the Secretary's declaration of financial recovery status under 2 Pa.C.S. §§ 501—508 and 701—704 (relating to Administrative Agency Law).

[Pa.B. Doc. No. 14-1495. Filed for public inspection July 18, 2014, 9:00 a.m.]



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