Guest column: Oak Ridge Schools explain funding issues, maintenance of effort test

In the spirit of collaboration, the Oak Ridge Schools would like to share pertinent information in regard to the current maintenance of effort (MOE) issue that faces our community. Tennessee law requires that local governments fund local school systems by at least the same amount each year.

In August, Oak Ridge Schools were notified by the State Department of Education, Office of Local Finance, about the failure to pass the MOE test. Failure to correct this problem by Oct. 1 will result in a loss of Basic Education Program (BEP) funding at a rate of $1.87 million per month.

The only possible resolution to satisfy state law is an increase in local funding from the city general fund in the amount of $250,000. This budget amendment would need to be approved in two readings by City Council, and two readings by the Board of Education.

Numerous meetings have occurred between city and schools staff. In addition, the “high school debt/potential failure of MOE” item has been an ongoing discussion for the past two years. To date, no meetings have been scheduled by the City Council to make the necessary budget amendments.

We have been extremely transparent in working through this matter and will continue to do so. We have provided our community with our talking points on this matter…not only in an effort to resolve the current MOE issue but also to move forward with a signed agreement on the Oak Ridge High School debt issue.

We feel this is a golden opportunity to bring Oak Ridge Schools and the city together. We want to work together to make Oak Ridge a great place to live, work, and learn.

• On Aug. 1 each year, a number of state reports are due to the State of Tennessee from school systems. Among these are the “Annual Financial Report” for the previous year and the “Budget Detail Report” for the current school year.
• The state performs a “Maintenance of Effort” test, comparing “budgeted” local revenues from one budget year to the next. In order to pass the test, the school system must have budgeted for the current year, equal to or greater than, the local revenues budgeted for the previous year.
• If a system fails this first tier of the test AND has experienced a drop in average daily membership (ADM), a second tier of the test is available and administered to determine if the local revenue per student is equal to or greater than the previous year.
• Oak Ridge Schools have been notified by the State of Tennessee that they have failed both levels of the MOE test for local revenue. Local revenue considered in the test includes county property, sales and mineral taxes, local interest on investments, and lease/rental income, Public Law 874, and city general fund transfers. The second tier shortfall for Oak Ridge Schools is $393,918.
• Upon review of Fiscal Year 2013 actual receipts in these categories, we are recommending a budget amendment to increase property and sales tax budgeted revenues for FY14 from the counties of Anderson and Roane. We also are recommending decreasing the mineral tax line item from Anderson County. All other line items would remain as budgeted originally. This will still leave a shortfall of $250,000. The schools do not have the ability to fund the $250,000. Use of its fund balance is not an option. The only remaining revenue stream included in the MOE formula is the city general fund transfer. The schools are requesting that the City of Oak Ridge fund this shortfall.
• The FY14 Budget must be amended by Sept. 30 to address the shortfall. This will take two board meetings to accomplish a first and second Reading. The school district is ready to make the necessary amendments immediately.
• The State will withhold BEP funding on a monthly basis beginning Oct. 1 until the situation is resolved. For Oak Ridge that means $1,869,900 per month. Use of fund balance from the schools’ general fund to continue operations is not an option. It does not qualify as local revenue to satisfy the MOE test, so it will not solve the problem, only delay it. If the fund balance were depleted, it would leave the district with major cash flow issues for future operations.
• The superintendent has been in communication with the city manager regarding this issue since shortly after we were notified by the state. We have explained the formula, the results of the test, and the penalties for non-compliance. We are working together toward a timely resolution to this matter.

Maintenance of effort and connection to ORHS debt and sales tax collections

• In FY13, the city passed their budget with an allocation of $14,629,302 to the schools. In their next action that evening, they reduced the allocation by $766,470, making the allocation $13,862,832.
• The city decided to cease having sales tax revenues sent to them from the schools for ORHS debt because the amount that was generated from collections within the Oak Ridge portion of Anderson County (per the referendum) did not generate the number they needed for the debt. The city’s budget amendment automatically deducted $766,470 from the schools’ allocation.
• This left the schools’ budget unbalanced. In an attempt to balance their budget, the school board came back and amended the school budget to (1) reflect the reduction in the City allocation, and (2) reflect “keeping” the sales tax that would have been sent to the city (per the referendum – $482,589). However, the budget was still not balanced and was short by $283,881. (This figure is the equivalent of the sales tax generated in Anderson County, outside of Oak Ridge, and by law is for school operations.)
• So to address this, the board included an additional $289,513 in Anderson County sales tax revenue as part of the FY13 amended budget, along with a reduction in property tax revenue of $5,632, to balance things out. The $289,513 was received in FY12 and had been booked in FY12 as a potential liability, pending the outcome of school and city discussion regarding sales tax collections and ORHS debt. The schools’ auditor recommended the reclassification as revenue in FY13, due to a lack of resolution to the sales tax issues with the city.
• The overall total of the school budget for FY13 remained the same. However, the sales and property tax revenue line items were adjusted as mentioned above, along with the city revenue allocation. In FY14, the city allocation remained the same as the “amended” version of FY13. The actual reduction occurred between FY12 and FY13. The board waited until April to complete balancing amendments to their budget, in hopes that the sales tax issues would be resolved. Those amendments reached the state in a report due in August 2013.

Moving forward toward resolution of MOE and appropriation of sales tax for ORHS debt

Immediate MOE actions required:

• The city’s FY14 budget must be amended to increase the allocation to the schools by $250,000 to meet the maintenance of effort (MOE) test for FY14.
• The schools’ FY14 budget must be amended to reflect the increase in the city’s allocation to the schools of $250,000. Other amendments must be made to the sales, property, and mineral tax revenue line items. The overall increase to revenue must total $393,918.
• The schools’ FY14 budget detail report to the state must be amended by Sept. 30 in order to prevent any delay of state BEP payments to the schools beginning Oct. 1.
• Should the MOE situation not be resolved by Sept. 30, ORS has been advised by legal counsel to not use fund balance to continue operations, and therefore, the only option would be to temporarily close school on Oct. 1 until a resolution is reached.

Future actions regarding ORHS debt and sales tax collections

• In the absence of a written agreement outlining the original five-year “Gentleman’s Agreement” entered into by the City of Oak Ridge and Oak Ridge Schools, regarding use of the school’s county sales tax proceeds (operational money) for ORHS debt retirement, the Board of Education proposes that the parties return to and honor the financial terms as outlined in the referendum language.
• The referendum had jurisdiction over sales tax collections within the Oak Ridge portion of Anderson County. Anderson County sales tax collected within the City of Oak Ridge should be tracked and calculations made to determine the referendum supported portions that should go towards ORHS debt retirement.
• The schools will continue to receive monthly information from Anderson County which breaks down the sources of collection. This information will be used to calculate the portion of the sales tax from the City of Oak Ridge collections that was earmarked by the referendum for ORHS debt. (City collections multiplied by .181818). Those amounts will be forwarded monthly from the schools to the city.
• Should the city prefer an outside auditor to review annual calculations, the schools will make work papers available for that purpose. Should the auditors identify any necessary adjustments, appropriate reconciliations will be made at year end between the schools and the City of Oak Ridge.
• The city should make available to the schools ORHS project-specific debt retirement schedules that clearly indicate the length of the term that the schools’ payments will be required to satisfy the ORHS debt. Any future debt schedule changes made by the city (refinancing, etc.) should be made available to the schools. The intent of the referendum was for ORHS debt, not for any other previous outstanding school debt.
• The original ORHS project budget was approved at $60,800,000. The design group contributed an additional $200,000 to the project, and a private citizen donated an additional $200,000 in cash for the orchestra pit construction. This made the total budget for the ORHS building project $61,200,387. The schools stayed within the spending limits of the budget and, in fact, came in under budget by $973.
• The $7.5 million in additional debt issued by the city in 2010 should not be tagged onto the original ORHS project budget total. It is clear according to the 2005 GFOA Blue Book, that “no interest should be capitalized in connection with capital assets used in Governmental activities,” so this action did not comply with practices outlined in GASB Statement No. 34.