A study of the early warning systems used by the fifty state departments of education to monitor local district fiscal solvency

This study surveyed fifty state departments of education to determine which states used an early warning system for monitoring the fiscal solvency of local districts. The point of reference was the Financial Watch List as part of the Illinois Financial Assurance and Accountability System (FAAS). In addition to Illinois, nine other states responded with early warning systems. Two states used a budget watch process and five additional states had criteria for determining if schools were in financial distress. At the time of the study, twenty-seven states indicated one or more districts were fiscally distressed. Even though states often had statutes holding board members liable for deficit spending, prosecution of board directors was rare. The use of early warning systems contributed to increased public confidence in the local districts. There was a wide degree of tolerance for determining fiscally solvency, varying from a negative eight percent (-8%) fund balance to one month's local payroll (approximately 8%). There was a wide degree of variance in state department involvement with technical and financial assistance for fiscally distressed districts. Some states provided almost no technical assistance or only responded when the local district requested it. Some states provided high levels of oversight through online accounting systems and periodic contacts from the state department. Some states offered no financial assistance for districts in deficit spending while some states had additional funds, released state aid early, or allowed special legislation. The study recommended that state departments provide direct monitoring of the fiscal conditions of the local districts through online accounting systems and minimum fund balances. State departments and state governments must simplify the budgeting process and provide multi-year appropriations so that districts can more accurately predict revenues and determine cash flow. Recommendations for minimum and maximum fund balances were offered. More training in accounting and financial management was recommended for administrators and board members.