Title 22—EDUCATION STATE BOARD OF EDUCATION [ 22 PA. CODE CH. 18 ] Financial Recovery [46 Pa.B. 4955]
[Saturday, August 13, 2016]The State Board of Education (Board) adopts Chapter 18 (relating to financial recovery) to read as set forth in Annex A.
Statutory Authority
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 final-form 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 (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 Committee met four times in 2012 to develop draft proposed regulations for the Board's consideration. The Committee meetings were open to the public and public comment was invited at each meeting.
From its first meeting on September 6, 2012, through the conclusion of its deliberations on December 6, 2012, the Committee worked in conjunction with the Board's Standing Committee on Financial Recovery (Standing Committee). Updates on the development of the draft regulations were reported to the full Board at its public meetings on September 13, 2012, and November 15, 2012. In addition, the full Board reviewed and considered the draft regulations at two additional public meetings in 2013, and reviewed and considered final regulations at its public meeting on November 13, 2014. Opportunity for public comment was part of the agenda at each of the Board's public meetings.
In the early stages of its deliberations, the Committee reviewed its statutory charge and received a presentation on Act 141 so that 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 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 Committee reviewed relevant policies from Michigan, California, Texas, Florida, Arizona and Illinois. The Committee also reviewed other Commonwealth laws concerning financially distressed entities to be better informed regarding the criteria used in other Commonwealth policies to classify distressed local governments.
Upon receiving the Committee's recommendation on Chapter 18, the Standing Committee held a public meeting on January 9, 2013, and adopted amendments to further refine areas where the Standing Committee felt the Committee's recommendation needed greater clarity. Proposed Chapter 18, as approved by the Standing Committee, was then presented for additional input by 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 rulemaking.
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 proposed 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.
Notice of proposed rulemaking was published at 44 Pa.B. 4514 (July 19, 2014). The public comment period closed on August 18, 2014. The Board reviewed Chapter 18 and adopted it as a final-form rulemaking with minor clarifying technical revisions at the Board's public meeting on November 13, 2014.
Public Comments on the Proposed Rulemaking
The Pennsylvania School Boards Association (PSBA) submitted comments on the proposed rulemaking in a letter to the Board dated August 13, 2014. PSBA's letter was the only comment that the Board received during the public comment period. PSBA expressed support for the rulemaking. PSBA also suggested the addition of language to § 18.2 (relating to purpose) stating that no weighting of the 18 criteria in the rulemaking may be inferred and that one specific criterion may not be used to make a declaration of recovery status. Act 141 did not include these types of stipulations. The Board believes that these stipulations are unnecessary in the regulations and contrary to the intent of Act 141 and the Board.
A statement that no weighting of the criteria may be inferred could be misinterpreted so as to render each criterion equal to the others. Hence, the suggested language could undermine the Board's intent of not assigning weight to individual criteria. Section 621-A(a)(2)(i) of the School Code states the Secretary ''may consider'' the criteria in determining whether to issue a declaration. Hence, the Secretary is given the authority to use discretion concerning the criteria. There is not language stating the criteria are all equal. Given the number and variety of school districts across this Commonwealth, each with its unique financial conditions, it would not be prudent to limit the ability of the Secretary to determine and address the financial conditions in a particular district.
The Independent Regulatory Review Commission (IRRC) also submitted comments, which the Board received on September 17, 2014. After noting that Act 141 directs the Board to promulgate regulations establishing additional criteria, IRRC questioned whether the three new criteria in regulations were consistent with the intent of Act 141. IRRC asked if the Board consulted with the General Assembly to determine if the three additional criteria satisfy the mandate of Act 141.
The Chairpersons of the House and Senate Education Committees (Committees) are members of the Board ex officio. Through this statutorily prescribed structure, the Board was in continuous communication with relevant policy leaders of the General Assembly concerning its activities in developing this final-form rulemaking. As previously noted, the Board reviewed the development of Chapter 18 at five different public meetings. The Board shared copies of the rulemaking with the Committee Chairpersons as it was being reviewed and approved by the Board, and as required under the Regulatory Review Act (71 P.S. §§ 745.1—745.14).
Provisions of the Final-Form Rulemaking
This final-form rulemaking is virtually identical to the proposed rulemaking. There are not substantive revisions. Ten minor changes were made to clarify and streamline the text. More than half of these minor revisions are in § 18.3 (relating to definitions). The revisions streamline definitions by deleting text that repeats the definitions in 602-A of the School Code (24 P.S. § 6-602-A) and conforms Chapter 18 to regulatory drafting standards by referring to the citation when definitions exist in statute. The changes also add a clarifying reference to the Manual of Accounting and Related Financial Procedures for Pennsylvania School Systems to the definition of ''total annual expenditures.''
In response to a tolling memo submitted by the Office of Attorney General on the proposed rulemaking, the Board also added a reference to section 621-A(a)(2) of the School Code in § 18.7 (relating to moderate and severe recovery status for declarations issued under section 621-A(a)(2) of the School Code) to clarify the scope and purpose of this section. The addition of the cross-reference makes it more explicit that § 18.7 applies only in circumstances when the Secretary has discretion in determining whether to declare a school district to be in financial recovery status after considering the criteria in § 18.5 (relating to issuance of declaration under section 621-A(a)(2) of the School Code).
As noted in the proposed rulemaking, the regulations include provisions from Act 141 for completeness. The final-form rulemaking implements section 621-A of the School Code and includes: procedures for issuance of a declaration of the financial recovery status of a school district by the Secretary; the 18 criteria that the Secretary may consider in determining whether to issue a declaration; the statutory limitation that no more than 9 districts may be declared to be in financial recovery status or in receivership at any time; and delineations of when a district is in moderate or severe recovery status.
Section 18.8 (relating to appeal) refers to section 621-A(c) of the School Code, which states that declarations of financial recovery status are subject to appeal under 2 Pa.C.S. §§ 501—508 and 701—704 (relating to Administrative Agency Law). This is included for completeness.
Affected Parties
This final-form rulemaking will guide the decision making of the Secretary and affect work of the Department's staff.
Cost and Paperwork Estimates
The Commonwealth 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. These models also can be applied to criteria identified in this final-form rulemaking.
This final-form rulemaking also establishes new responsibilities for the Secretary and staff of the Department. The Department estimates it will incur an annual cost of $738,950 to support staffing necessary to carry out new responsibilities related to collecting and analyzing information pertaining to the criteria in this final-form rulemaking and to undertake certain legal procedures. Based on the Governor's proposed General Government Operations appropriation, the Department will redirect current resources to absorb these costs and carry out its statutory obligations with no additional funds.
Effective Date
The final-form rulemaking will be effective upon 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 the notice of proposed rulemaking, published at 44 Pa.B. 4514, to IRRC and the Chairpersons of the Committees on for review and comment.
Under section 5(c) of the Regulatory Review Act, the Board shall submit to IRRC and the House and Senate Committees copies of comments received during the public comment period, as well as other documents when requested. In preparing the final-form rulemaking, the Board has considered all comments from IRRC and the public.
Under section 5.1(j.2) of the Regulatory Review Act (71 P.S. § 745.5a(j.2)), on June 29, 2016, the final-form rulemaking was deemed approved by the House and Senate Committees. Under section 5.1(e) of the Regulatory Review Act, IRRC met on June 30, 2016, and approved the final-form rulemaking.
Contact Person
For information about Chapter 18, contact Karen Molchanow, Executive Director, State Board of Education, 333 Market Street, Harrisburg, PA 17126-0333, (717) 787-3787.
Findings
The Board finds that:
(1) Public notice of the intention to adopt this final-form rulemaking was given under sections 201 and 202 of the act of July 31, 1968 (P.L. 769, No. 240) (45 P.S. §§ 1201 and 1202), and the regulations promulgated thereunder, 1 Pa. Code §§ 7.1 and 7.2.
(2) A public comment period was provided as required by law and all comments were considered.
(3) The final-form rulemaking is necessary and appropriate for the administration of the School Code.
Order
The Board, acting under the authorizing statute, orders that:
(a) The regulations of the Board, 22 Pa. Code, are amended by adding §§ 18.1—18.8 to read as set forth in Annex A.
(b) The Chairperson of the Board will submit this order and Annex A to the Office of General Counsel and the Office of Attorney General for review and approval as to legality and form as required by law.
(c) The Chairperson of the Board shall certify this order and Annex A and deposit them with the Legislative Reference Bureau as required by law.
(d) This order is effective upon publication in the Pennsylvania Bulletin.
KAREN MOLCHANOW,
Executive Director(Editor's Note: See 46 Pa.B. 3894 (July 16, 2016) for IRRC's approval order.)
Fiscal Note: 6-329. (1) General Fund; (2) Implementing Year 2016-2017 is $739,000; (3) 1st Succeeding Year 2017-18 through 5th Succeeding Year 2021-22 are $739,000; (4) 2015-16 Program—N/A; 2014-15 Program—N/A; 2013-14 Program—N/A; (7) General Government Operations (Department of Education); (8) recommends adoption. The Department of Education General Government Operations appropriation, as proposed in 2016-17, is able to absorb the increased cost.
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 for declarations issued under section 621-A(a)(2) of the School Code. 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—The term as defined in section 602-A of the School Code (24 P.S. § 6-602-A)).
Deficit—The term as defined in section 602-A of the School Code.
Expenditures—The term as defined in section 602-A of the School Code.
Financial recovery school district—The term as defined in section 602-A of the School Code.
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—The term as defined in section 602-A of the School Code.
Revenues—The term as defined in section 602-A of the School Code.
School Code—The Public School Code of 1949 (24 P.S. §§ 1-101—27-2702).
School district—The term as defined in section 602-A of the School Code.
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) as defined in the Manual of Accounting and Related Financial Procedures for Pennsylvania School Systems, 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 will 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 merged 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 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 for declarations issued under section 621-A(a)(2) of the School Code.
(a) Moderate recovery status. The Secretary will issue a declaration that a financial recovery school district is in moderate recovery status under section 621-A(a)(2) of the School Code (24 P.S. § 6-621-A(a)(2)) if the financial recovery school district is not declared by the Secretary in severe recovery status.
(b) Severe recovery status. The Secretary will issue a declaration that a financial recovery school district is in severe recovery status under section 621-A(a)(2) of the School Code 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. 16-1390. Filed for public inspection August 12, 2016, 9:00 a.m.]
