Developing a Financial Condition Indicator System FCIS for New York State School Districts

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Developing a Financial Condition Indicator System
(FCIS) for New York State School Districts

• Condition Reports Public Forum
• June 6, 2003
• William Duncombe, Bernard Jump, Syracuse
  University
• Salwa Ammar, Ronald Wright, Le Moyne College
• duncombe_at_maxwell.syr.edu
• Available at http//www-cpr.maxwell.syr.edu/facul
  ty/duncombe/

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School Districts Are Facing Unprecedented Fiscal
Stress

• Many states are facing large budget deficits
• 30 billion in FY 2003
• 80 billion in FY 2004
• At least 18 states have budget gap of 10 or
  more.
• State education budgets will not be spared
• Predicted that half of the states will cut state
  education budgets in FY2004
• At same time that state and federal
  accountability standards are being imposed.

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Need for Greater Visibility on School District
Financial Condition

• General public usually has little awareness of
  school financial condition until a crisis
  emerges.
• By then the choices are often limited and can
  require painful expenditure cuts or tax
  increases.
• The best prevention against financial emergencies
  is regular monitoring of district fiscal health,
  and appropriate budget adjustments.

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Objectives of Project

• To develop a FCIS that captured the multiple
  dimensions of financial condition.
• To develop a modular system, where the different
  components of financial condition can be used
  separately.
• To develop a system that can effectively use the
  judgment of financial experts.
• To develop a system that is flexible, and can
  adapt to changing circumstances.

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Outline of Presentation

• Framework for Financial Condition Indicator
  System (FCIS)
• Development process and methodology
• FCIS example
• Overall results
• Potential uses of FCIS

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Definition of Overall Financial Condition Used in
building FCIS

• Financial condition of school districts is
  defined as the ability to finance adequate
  student performance over the long-run with
  reasonable tax burdens and without temporary
  disruptions of service.
• Adequate student performance implies students
  reaching the academic standards set by the New
  York State Board of Regents.

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Financial Condition Framework
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Short-Run Financial Condition

• Ability to pay bills over the course of the year,
  balance the budget, and maintain adequate fund
  balance without extraordinary measures.
  Categories of indicators include
• Liquidity Ability to pay bills.
• Fund balance Does district have adequate
  reserves to cover financial emergencies?
• Tax capacity Can district raise significant
  revenue without heavy tax burden or political
  opposition?

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Long-Run Financial Condition

• Ability to finance adequate services over the
  long-run without onerous tax burdens and debt
  burdens. Consider similar factors as credit
  rating agencies
• Debt burdens/Capital spending Can district
  support adequate capital spending without undue
  debt burdens?
• Fund balances Can the district maintain adequate
  reserves to protect itself against financial
  emergencies?
• Revenue indicators Does the district have a
  diversified and stable revenue base that can
  support adequate spending without high tax
  burdens?

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Economic Condition

• Ability of the local economy to support adequate
  expenditure levels without undue local tax
  burdens.
• Costs How expensive will it be for the district
  to provide adequate services due to input costs
  and student needs?
• Fiscal capacity Does the district have a strong
  tax base that continues to grow?
• Population Is population growing, and is the
  demographic picture changing in ways that will
  affect school district?
• Enrollment Is enrollment growing and has it been
  stable?
• Employment Is the county economy growing,
  diversified, and does it provide high wage
  employment?

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Student Performance Measure

• Based on published data in school report cards,
  and measures used in System for Accountability
  for Student Success (SASS) developed by SED.
• 4th and 8th Math and ELA Exams Percent of
  students reaching levels 2, 3, and 4.
• Regents Math and English Percent of students
  (who entered high school 3-years before) that
  received a 55 to 64 (level 2), 65 to 84 (level
  3), and 85 and above (level 4).

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Outline of Presentation

• Framework for Financial Condition Indicator
  System (FCIS)
• Development process and methodology
• FCIS example
• Overall results
• Potential uses of FCIS

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Our Approach to Developing FCIS

• SED appointed an advisory board to serve as panel
  of experts.
• Developed a comprehensive framework for
  evaluating financial condition.
• Advisory board played a key role in selecting and
  refining the measures used in the system.
• Used state-of-the-art technology to capture the
  judgment of the advisory board on how to combine
  measures into an overall evaluation.

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Advisory Board

• Steven Hancox, Assistant Deputy Comptroller for
  Municipal Affairs
• Jack Dougherty, Chief Examiner (Performance
  Services and Risk Assessment)
• John Clarkson, Assistant Comptroller
• Office of the State Comptroller
• George Perry, Executive Director
• Steven VanHoesen, Deputy Director
• NYS Association of School Business Officials
• Robert Loretan, Emeritus Director
• Tom Rogers, Executive Director
• Bob Lowry, Associate Director for Governmental
  Relations
• New York State Council of School Superintendents
• Tim Kremer, Executive Director
• David Little
• New York State School Boards Association

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Advisory Board

• Martin D. Handler, District Superintendent
• Sullivan County BOCES
• Marianne VanDuyne
• R.S. Abrams and Company
• Terry Schruers, Assistant Superintendent for
  Business
• New Hartford Central School District
• Shane Higuera, Associate Superintendent of
  Management Services
• Eastern Suffolk BOCES
• Charles Szuberla, Coordinator, Office of School
  Operations and Management Services
• Deborah Cunningham, State Aid Work Group
  Coordination and Cost-Effectiveness
• Dan Tworek, Director, Audit Services
• Michael Abbott, Audit Manager, Office of Audit
  Services
• NYSED

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Methodology Used for FCIS Fuzzy Rule-Base
System (FRBS)

• FRBS is a method for organizing all the key
  factors affecting the financial condition in a
  way to capture the key tradeoffs that exist among
  factors.
• FRBS is a method for converting all data into
  common measurement scale that can be combined,
  but still preserve all the information. All
  variables converted into membership levels in 3
  sets (fuzzy sets). A district can have
  membership in more than one set.
• FRBS is a systematic method for capturing the
  judgment of experts on how they evaluate data
  under different situations. We call this
  capturing the contextual judgment of experts
  using rule bases.

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Outline of Presentation

• Framework for Financial Condition Indicator
  System (FCIS)
• Development process and methodology
• FCIS example
• Overall results
• Potential uses of FCIS

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Debt
Poor Fair Good
0.00 0.74 0.26
Debt Burden
Capital Spending
High Mod Low
Low Mod High
0.00 0.06 0.94
0.74 0.26 0.00
3.5
Debt Limit
Low Mod High
1.00 0.00 0.00
0.04
1.3
Adj. Debt Vs FV
11-year average
Debt Service
Low Mod High
Low Mod High
Low Mod High
322
0.94 0.06 0.00
0.74 0.26 0.00
0.66 0.34 0.00
0.2
3-year average
23.2
Debt Vs FV
Low Mod High
Payoff Rate
Low Mod High
0.82 0.18 0.00
Low Mod High
0.89 0.11 0.00
0.00 0.00 1.00
246
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Revenue
Poor Fair Good
0.20 0.75 0.25
Property Tax
Poor Fair Good
0.20 0.75 0.25
90
Diversity
Tax Burden
High Mod Low
0.00 0.83 0.17
Poor Fair Good
0.20 0.75 0.25
67.8
of FV
Trend
Aid Dependence
3.5
Low Mod High
Neg. Low High
Low Mod High
0.00 0.80 0.20
0.00 0.60 0.40
0.00 0.31 0.69
1.9
of income
Defeats
0
2.8
Low Mod High
None One Two
0.25 0.75 0.00
1.00 0.00 0.00
3.8
Stability
High Mod Low
0.47 0.53 0.00
FV/ Enrollment
AV/FV
25.7
Low Mod High
Low Mod High
0.72 0.28 0.00
0.54 0.46 0.00
196,178
Income/Enrollment
Low Mod High
97,771
0.00 1.00 0.00
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Fiscal Capacity
Poor Fair Good
0.63 0.37 0.00
FV/Enrollment
196,178
Low Mod High
0.54 0.46 0.00
Income/Enrollment
97,771
Low Mod High
0.00 1.00 0.00
FV Growth
Low Mod High
-3.4
1.00 0.00 0.00
Income Growth
Low Mod High
3.7
0.63 0.37 0.00
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District B
Overall
Poor Fair Good
0.00 1.00 0.00
Short Run
Long Run
Poor Fair Good
Poor Fair Good
1.00 0.00 0.00
0.36 0.64 0.00
Performance
Economy
189.2
Low Mod High
Poor Fair Good
0.00 0.00 1.00
0.00 0.00 1.00
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Outline of Presentation

• Framework for Financial Condition Indicator
  System (FCIS)
• Development process and methodology
• FCIS example
• Overall results
• Potential uses of FCIS

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Relationship between Measures

• SR condition and LR condition are highly related
  (0.76), but they are not correlated strongly with
  economic condition.
• SR condition is not strongly related to property
  values or income.
• Revenue, economic condition, and student
  performance are strongly related to property
  values and income.

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Comparison of Overall Financial Condition by
Need/Resource Capacity Categories
0.9
Good
Fair
0.8
Poor
0.7
0.6
0.5
Membership levels
0.4
0.3
0.2
0.1
0
BIG 4
HIGH-NEED
HIGH NEED RURAL
AVERAGE NEED
LOW NEED
URBAN/SUBURBAN
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Comparison of Short Run Financial Condition by
Need/Resource Capacity Categories
0.7
Good
Fair
0.6
Poor
0.5
0.4
Membership levels (overall score)
0.3
0.2
0.1
0
BIG 4
HIGH-NEED
HIGH NEED RURAL
AVERAGE NEED
LOW NEED
URBAN/SUBURBAN
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Comparison of Long Run Financial Condition by
Need/Resource Capacity Category
0.7
Good
Fair
0.6
Poor
0.5
0.4
Membership levels (overall score)
0.3
0.2
0.1
0
BIG 4
HIGH-NEED
HIGH NEED RURAL
AVERAGE NEED
LOW NEED
URBAN/SUBURBAN
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Comparison of Economic Condition by
Need/Resource Capacity Categories
0.9
Good
Fair
0.8
Poor
0.7
0.6
0.5
Membership levels (overall score)
0.4
0.3
0.2
0.1
0
BIG 4
HIGH-NEED
HIGH NEED RURAL
AVERAGE NEED
LOW NEED
URBAN/SUBURBAN
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Share of Districts with Poor Financial Condition
by
Component and Need/ Resource
Capacity Category
1
0.9
Total
0.8
Short Run
0.7
Long Run
0.6
Economic
Student Performance
0.5
Low score districts as share of total
0.4
0.3
0.2
0.1
0
BIG 4
HIGH-NEED
HIGH NEED RURAL
AVERAGE NEED
LOW NEED
URBAN/SUBURBAN
Note Districts with membership levels in the
poor set of at least 0.50.
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Share of Districts with Good Financial Condition
by
Component and Need/ Resource
Capacity Category
1
Total
0.9
Short Run
0.8
Long Run
Economic
0.7
Student Performance
0.6
0.5
High score districts as share of total
0.4
0.3
0.2
0.1
0
BIG 4
HIGH-NEED
HIGH NEED RURAL
AVERAGE NEED
LOW NEED
URBAN/SUBURBAN
Note Districts with membership levels in the
good set of at least 0.50.
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Outline of Presentation

• Framework for Financial Condition Indicator
  System (FCIS)
• Development process and methodology
• FCIS example
• Overall results
• Potential uses of FCIS

36
Potential Uses of FCIS

• Early warning system to help SED identify
  districts at risk of financial problems.
• Training tool for SED and other education
  organizations on key components of strong
  financial condition.
• Benchmarking tool for district administrators to
  compare their financial condition to similar
  districts. Can peel back layers of system to see
  where condition is good and where it needs
  improvement.
• Oversight tool for school boards to monitor
  district finances.
• Information system for the general publiccould
  be used to develop interactive school district
  financial report card.