Draft FIRST Indicators:
Merging FIRST and Solvency
Texas Education Agency
Discussion About Concepts and Scores
Draft Proposed Categories: First Year
• Pass
• Fail
• Substandard Data Quality—the Annual
Financial and Compliance Report (AFR) and
the data feed (or Charter School Data
Template) was not turned in on time and was
not complete for FIRST analysis.
Draft Proposed Categories–Second Year
•
Superior is the highest possible score.
– This score recognizes the districts and charters with the highest financial integrity.
•
High Score is a new category
– This score indicates the district or charter has a high degree of financial integrity.
•
Above Standard is an existing category
– This score indicates that the district or charter has performed significantly above the minimum
passing score.
•
Meets Standard is the minimum passing score.
– This score indicates that the district or charter meets the minimum passing standard for
financial integrity.
•
Substandard, which may result from critical fail indicators or exceptionally low
total points awarded.
– This score indicates that the district or charter does not have financial integrity.
– This will focus TEA attention on districts and charters that need improvement.
•
Substandard Data Quality because the AFR and data feed (or Charter School Data
Template) was not turned in on time and was not complete for FIRST analysis.
– This score indicates that the district or charter does not have the controls necessary to
demonstrate financial integrity within a reasonable timeframe of 150 days.
Draft Comparing 2013 Ratings in the
New FIRST and the Old FIRST systems.
• How the new system will be an improvement:
– The new system allows us to identify financially weak
school districts or charter schools that previously
scored superior.
– Several new indicators are more easily recognized and
interpreted by both the public and the finance
industry.
– Several new indicators have a wide, sliding point range
to allow a high, medium, or low point award for those
indicators.
– The superior rating has a higher standard, allowing
the TEA to recognize the highest performers.
Draft Comparing 2013 Ratings in the New FIRST
and the Old FIRST systems (Continued).
• School district comparison
– Old FIRST system
• 88.34% had a superior rating
• 1.36% had a substandard rating
– New FIRST system
• 24.6% had a superior rating
• 2.2% had a substandard rating
• Charter school comparison
– Old FIRST system
• 38.58% had a superior rating
• 13.3% had a substandard rating
– New FIRST system
• 14% had a superior rating
• 12% had a substandard rating
Expected ISD Performance Based on
Historical Data: Second Year
Expected CS Performance Based on
Historical Data: Second Year
Draft Critical Indicators
• Failure to meet the requirements of any
critical indicator would cause a failure of FIRST.
• Indicator 1—Timely Filing of the AFR
• Indicator 2—Must pass either:
– Unmodified Auditor Opinion for the AFR, or
– No Material Weakness Noted on the AFR
• Indicator 3—Monetary Default on Debt
• Indicator 4—Overdue Payroll Tax
Draft Indicator 1: Filing the AFR and
Electronic Data on Time
• Did the charter school or school district turn in the
complete Annual Financial Report (AFR) and data
feed (or Charter School Data Template) on time,
November 27 or
January 28 for fiscal year ending on June 30 or
August 31 respectively?
• Aligns with Texas Education Code (TEC), 44.008(d)
• No 30-day grace period
• Yes = Pass and No = Fail
• Source: AFR
Draft Indicator 1: AFR and Electronic
Data on Time–Continued
• TEC, §44.008(d)
– The district shall file a copy of the annual audit
report, approved by the board of trustees, with
the agency no later than the 150th day after the
end of the fiscal year for which the audit was
made. If the board of trustees declines or refuses
to approve its auditor's report, it shall
nevertheless file a copy of the audit report with its
statement detailing reasons for failure to approve
the report with the agency.
Draft Indicator 2: Unmodified Opinion or
Material Weakness for AFR
• Must pass either:
– Unmodified Auditor Opinion for AFR, or
– No Material Weakness Noted on AFR
• No = Pass and Yes = Fail
• Source: AFR
Draft Indicator 2.A: Unmodified Opinion for
AFR
• Did the AFR indicate an unmodified opinion that
the financial statements as a whole are free from
material misstatements due to errors or fraud.
– Unmodified, modified, adverse, or disclaimer of
opinion are defined by the American Institute of
Certified Public Accountants (AICPA) and determined
by your external auditor.
• No = Pass and Yes = Fail
• Source: AFR
Draft Indicator 2.B: Material Weakness
Noted On AFR
• Was there any indication on the AFR of
material weakness for internal controls related
to either local funds, state funds, or federal
funds?
– A material weakness is defined by the AICPA and
determined by the independent external auditor.
• No = Pass and Yes = Fail
• Source: AFR
Draft Indicator 3: Default on Debt
• Was there a monetary default (overdue principle
and interest payments) related to a loan, bond,
debenture, borrowed money, bond sinking fund,
or any other form of debt (excluding payables to
vendors where money was not borrowed)?
– This indicator is failed on the first year that default is
noted in the AFR.
– An exemption applies in following years if the entity
has a payment plan with the lender and that payment
plan is paid on schedule.
Draft Indicator 3: Default on Debt
– Technical defaults not related to monetary
defaults are also exempted.
• A technical default is a failure to uphold terms of a debt
covenant, contract, or master promissory note even
though payments to the lender, trust, or sinking fund
are up to date.
• No = Pass and Yes = Fail
• Source: AFR
Draft Indicator 4: Overdue Payroll Tax
• Were payroll taxes that were owed to the Internal
Revenue Service (IRS), Teachers Retirement System
(TRS), Texas Workforce Commission (TWC), and other
government agencies paid on time?
– This indicator is failed on the first year that delinquency
occurs.
– An exemption applies in subsequent years if the entity has
a payment plan with the IRS and that payment plan is paid
on schedule.
• No = Pass and Yes = Fail
• Source: IRS tax data is on the AFR
• Source: TRS and TWC data is from the comptroller’s
office.
Point values for indicators 6 - 16
Indicator
Points
5
10
6
10
7
10
8
10
9
10
10
10
11
5
12
5
13
10
14
10
15
10
Total for all indicators
100
Draft Solvency Indicators
• Each indicator focuses on the solvency of the entity.
• Indicator 5: Days Cash On Hand
– Upper score range has been reduced for both school
districts and charter schools
• Indicator 6: Current Assets to Current Liabilities Ratio
– Upper score range has been reduced for both school
districts and charter schools
• Indicator 7: Long-Term Liability to Long-Term Asset
Ratio
– Score range has changed for both school districts and
charter schools since the initial draft.
Draft Solvency Indicators
• Indicator 8: Expenditure Analysis
– No longer percent driven, simple pass/fail
– School Districts: Compare General Fund Revenue to
Expenditures Less Adjustments
– Charter Schools: Total Revenue to Expenses Less Depreciation
– If revenues are less than expenditures, a passing score can be
achieved if the district or charter school achieves a passing score
on Indicator 6 (Days Cash on Hand)
• Indicator 9: Analysis of Unassigned Fund Balance or
Unrestricted Net Assets
– School Districts: Unassigned Funds to Expenditure Ratio
Excluding Adjustments
– Charter Schools: Unrestricted Net Asset to Expense Ratio
Excluding Depreciation
Draft Solvency Indicators
• Indicator 10: Debt Service Coverage Ratio
– The upper score range has been reduced for both
school districts and charter schools
– Verified a high pass rate for this indicator for both
school districts and charter schools
• Indicator 11: Administrative Cost Ratio
• Indicator 12: Decline of Student to Staff Ratio
by 15% or more.
Draft Indicator 5: Days Cash On Hand
• What was the amount of days cash on hand for
the school district or charter school?
• School districts:
– Numerator: Uses Cash & Equivalents and Current
Investments as reported in the Balance Sheet (General
Fund) on the AFR.
– Denominator: Uses expenditures less facilities
acquisition and construction as reported in the
Statement of Revenues, Expenditures, and Changes in
Fund Balance (General Fund) on the AFR.
– Multiply the ratio by 365 to produce number of days
of cash on hand
Draft Indicator 5: Days Cash On Hand
• What was the amount of days cash on hand for the
school district or charter school?
• Charter schools
– Numerator: Uses Cash & Equivalents and Investments as
reported in the Statement of Financial Position.
– Denominator: Uses total expenses less depreciation as
reported in the Statement of Activities.
– Government charter schools that follow GASB 68 will
exclude pension expense from total expenses.
– Multiply the ratio by 365 to produce the number of days of
cash on hand
• Worth up to 10 points
Draft Indicator 5: Days Cash On Hand
(COH)
Districts
Charters
0 points = < 30 days
0 points = < 20 days
2 points = 30 to 44 days
2 points = 20 to 29 days
4 points = 45 to 59 days
4 points = 30 to 39 days
6 points = 60 to 74 days
6 points = 40 to 49 days
8 points = 75 to 89 days
8 points = 50 to 59 days
10 points = 90+ days
10 points = 60+ days
Draft Indicator 6: Current Assets to
Current Liabilities
• What was the value of the current assets to current
liabilities for the school district or charter school?
– The current assets to current liability ratio indicates the
ability to pay current liabilities with current assets in the
near future. This differs from days cash on hand because
that indicator analyzes how many days of expenses you
can pay with cash on hand.
– School districts: Use current assets and current liabilities as
reported in the Statement of Net Position on the AFR.
– Charter schools: Use current assets and current liabilities
as reported in the Statement of Financial Position on the
AFR.
Draft Indicator 6: Current Assets to
Current Liabilities
• Current assets are divided by current
liabilities.
• The result (current ratio) is a standard ratio
used in commercial lending.
• Worth up to 10 points
Draft Indicator 6: Current Assets to
Current Liabilities
Districts
Charters
0 points = < 1
0 points = < 1
2 points = 1 to 1.49
2 points = 1 to 1.24
4 points = 1.5 to 1.99
4 points = 1.25 to 1.49
6 points = 2 to 2.49
6 points = 1.5 to 1.74
8 points = 2.5 to 2.99
8 points = 1.75 to 1.99
10 points = 3+
10 points = 2+
Draft Indicator 7: Long-Term Liability
to Long-Term Asset Ratio
• What was the value of the long-term liabilities to long-term
assets ratio for the school district or charter school?
– This measures long-term solvency and leverage.
– It measures only the long-term portion of your liabilities (bonds and loans)
and assets (school property, buildings, equipment, etc).
• School districts: Use long-term liabilities and long-term assets as
reported in the Statement of Net Position on the AFR (long term
= noncurrent).
– Long-term liabilities are divided by long-term assets.
– When Government Accounting Standards Board (GASB) 68 becomes a
reporting item for school districts, we will exclude Net Pension Liability
because it is volatile and cannot be controlled by school districts.
Draft Indicator 7: Long Term Liability to
Long Term Asset Ratio
• Charter schools: Use long-term liabilities and long-term
assets as reported in the Statement of Financial
Position on the AFR (long term = noncurrent).
– Data source: Financial statements not Public Education
Information Management System (PEIMS) data.
– When GASB 68 is a reporting item for government charter
schools, we will exclude Net Pension Liability because it is
volatile and cannot be controlled by charter schools.
• Worth up to 10 points
Draft Indicator 7: Long-Term Liability
to Long-Term Asset Ratio
Districts
Charters
0 points = > 1
0 points = > 1
2 points = 1 to 0.91
2 points = 1 to 0.91
4 points = 0.9 to 0.81
4 points = 0.9 to 0.81
6 points = 0.8 to 0.71
6 points = 0.8 to 0.71
8 points = 0.7 to 0.61
8 points = 0.7 to 0.61
10 points = 0.6 or less
10 points = 0.6 or less
DRAFT Indicator 8: Expenditure
Analysis for School Districts
• Did functional expenditures, less facilities
acquisition and construction, exceed revenue?
– Excessive spending or unrealistic budgets will cause
this to be negative.
• School districts:
– Numerator: Uses total revenue as reported in the
Statement of Revenues, Expenditures, and Changes in
Fund Balance (General Fund) on the AFR.
– Denominator: Uses expenditures less facilities
acquisition and construction as reported in the
Statement of Revenues, Expenditures, and Changes in
Fund Balance (General Fund) on the AFR.
DRAFT Indicator 8: Expenditure
Analysis for Charter Schools
• Charter schools:
– Numerator: Uses total revenue as reported in the
Statement of Activities on the AFR.
– Denominator: Uses expenditures less depreciation as
reported in the Statement of Activities and the
Statement of Cash Flows on the AFR.
• Will exclude pension expense for government charter
schools only if they follow GASB 68
• Worth 10 points if revenues exceed expenditures
OR
– If revenues are less than expenditures, then check for
passing score on Indicator 6: Days cash on hand
• If yes, then 10 points for this indicator
• If no, then 0 points for this indicator
Draft Indicator 9: Unassigned Fund Balance to
Expenditure Ratio–School Districts
• What was the value of the unassigned general fund balance relative
to expenditures excluding facilities acquisition and construction.
– If the school district exceeds 60 days cash on hand then the point
earned in that category will also be applied to this category.
– This indicator measures what assets are not restricted or assigned in
any way to your expenditures. The exception is if your cash days on
hand is relatively high.
• School districts:
– Numerator: Uses unassigned fund balance as reported in the Balance
Sheet (General Fund) on the AFR.
– Denominator: Uses expenditures less facilities acquisition and
construction as reported in the Statement of Revenues, Expenditures,
and Changes in Fund Balance (General Fund) on the AFR.
Draft Indicator 9: Unrestricted Net Asset to
Expense Ratio–Charter Schools
• Charter schools
– Numerator: Uses unrestricted net assets as
reported in the Statement of Financial Position on
the AFR.
– Denominator: Uses total expenses less
depreciation in the Statement of Activities and the
Statement of Cash Flows on the AFR.
– Government charter schools that follow GASB 68
will exclude pension expense as well.
• Worth up to 10 points
Draft Indicator 9: Unrestricted Net Asset to
Expense Ratio
Districts
Charters
Use points from days cash on hand if
days cash on hand is 60+
Use point from days cash on hand if days
cash on hand is 40+
0 points = < 0.06
0 points = < 0.02
1 points = 0.06 to 0.069
1 points = 0.02 to 0.029
2 points = 0.07 to 0.079
2 points = 0.03 to 0.039
3 points = 0.08 to 0.089
3 points = 0.04 to 0.049
4 points = 0.09 to 0.099
4 points = 0.05 to 0.059
5 points => 0.10
5 points => 0.06
Draft Indicator 10: Debt Service
Coverage Ratio
• What was the value of the debt service coverage ratio
for the school district or charter school?
– Commercial lending uses debt service coverage ratio as a
solvency measure.
• School districts:
– Numerator: Uses revenue less expenditures plus interest
on long-term debt and principle on long-term debt as
reported in the Statement of Revenues, Expenditures, and
Changes in Fund Balance (General Fund) on the AFR.
– Denominator: Uses interest on long-term debt and
principle on long-term debt.
– Does not include bond issuance costs and fees.
• Worth up to 10 points
Draft Indicator 10: Debt Service
Coverage Ratio
• Charter schools:
– Numerator: Uses revenue less expenditures plus
interest on long-term debt and principle on long-term
debt as reported in the Statement of Activities and
Statement of Cash Flows in the AFR.
– Denominator: Uses interest on long-term debt and
principle on long-term debt.
– Charter schools will be required to report payments of
long-term interest and principle as specific line items
in the AFR
• Worth up to 10 points
Draft Indicator 10: Debt Service
Coverage Ratio–Continued
• This is a phase-in indicator that will not be
applied until the third year of the new FIRST
standards.
• Cut scores will be developed.
– First year = no points considered
– Second year = up to 5 points
– Third year = up to 10 points
Draft Indicator 10: Debt Service
Coverage Ratio
Districts and Charters 2nd Year
Districts and Charters 3rd Year
0 points = < 1.00
0 points = < 1.00
1 points = 1.00 to 1.05
2 points = 1.00 to 1.05
2 points = 1.05 to 1.10
4 points = 1.05 to 1.10
3 points = 1.10 to 1.15
6 points = 1.10 to 1.15
4 points = 1.15 to 1.20
8 points = 1.15 to 1.20
5 points = > 1.20
10 points = > 1.20
Draft Indicator 11: Administrative Cost
Ratio
• What was the value of the administrative cost ratio for the
school district or charter school?
– Excessive administrative costs may reflect:
• Financial inefficiency
• "Top- heavy” organization
– Uses ADA thresholds to determine maximum administrative
cost ratios.
– Calculation is based on function codes (21+41)/(11+12+13+31)
– Only object codes 61XX through 64XX are used
• School districts: Fund code 199
• Charter schools: Fund code 420
• Worth 5 points
– Less than limit = Pass
– More than limit = Fail
Draft Indicator 11: Administrative Cost
Ratio
District
Charter
ADA Group
Threshold Ratio
ADA Group
Threshold Ratio
= >10,000
0.1105
= >10,000
0.2400
5,000 to 9,999
0.1250
5,000 to 9,999
0.2400
1,000 to 4,999
0.1401
1,000 to 4,999
0.2400
500 to 999
0.1561
500 to 999
0.2700
Less than 500
0.2654
Less than 500
0.3000
Sparse
0.3614
Draft Indicator 12: Student to Staff Ratio
• Did the school district or charter school have a 15
percent or more decline in student to staff ratio
over 3 years? (automatic pass if student
population has not decreased)
– This indicator would not apply to new charters until
the fourth year.
– The calculation method is very different than the old
student to staff ratio.
– Yes = Fail and No = Pass
– Worth 5 points
• Source: PEIMS enrollment data
Draft Indicator 12: Student to Staff Ratio–
Continued
• Did the school district or charter school have a 15
percent or more decline in student to staff ratio over 3
years? (automatic pass if student population has not
decreased)
• Example 1—Failed because of a student decrease
without staff decrease:
– In 2013–2014 fiscal year, the student to staff ratio was 10
(300 students, 30 staff FTEs).
– In 2016–2017 fiscal year, the student to staff ratio was 8.5
(255 students, 30 staff FTEs).
– (8.5–10) / 10 = -0.15 or 15% decline
– A 15% decline over three years is failing.
Draft Indicator 12: Student to Staff Ratio–
Continued
• Example 2—Passed because of a staff
decrease with a decrease in students:
– In 2013–2014 fiscal year, the student to staff ratio was 10
(300 students, 30 staff FTEs).
– In 2016–2017 fiscal year, the student to staff ratio was 9
(252 students, 28 staff FTEs).
– (9–10) / 10 = -0.10 or 10% decline
– A 10% decline over three years is passing.
Draft Financial Competence Indicators
• Each indicator identifies serious deficiencies in
financial management.
• Indicator 13: Data Quality
• Indicator 14: Material Noncompliance Noted
on AFR
• Indicator 15: FSP Hardship
Draft Indicator 13: Data Quality
• Did the comparison of PEIMS data to like information in
the charter school’s AFR data feed (or Charter School
Data Template) result in an absolute variance of 3% or
less?
– Financial data will be compared between PEIMS and the
AFR. The sum of absolute value of differences, by function,
will be compared. If the result (percent variance) exceeds
3%, the PEIMS data is considered inaccurate.
• Yes = Fail and No = Pass
• Worth 10 points
• Source: AFR data feed (or Charter School Data
Template) and PEIMS financial data
Draft Indicator 14: Material
Noncompliance Noted On AFR
• Was there any indication on the AFR of material
noncompliance for grants, contracts, and laws related
to either local funds, state funds, or federal funds? A
material noncompliance is defined by the AICPA and
determined by the independent external auditor.
– Schedules, notes, and comments on the AFR will be read in
context for the material noncompliance for grants,
contracts, and laws related to local funds, state funds, or
federal funds.
• Yes = Fail and No = Pass
• Worth up to 10 points
• Source: AFR
Proposed Indicator 15: FSP Hardship
• Did the charter school or district receive an
adjusted repayment schedule for an
overallocation of Foundation School Program
(FSP) funds due to a severe financial hardship?
• Yes = Fail and No = Pass
• Worth 10 points
• Source: State Funding Division records of
request and approval