We need to make sure that all budget amendments for our legally adopted budgets (i.e. General, Debt Service, and Food Service Funds) are made prior to your fiscal year-end.

We all have been hyper focused COVID-19 federal requirements. However, we need to make sure that all budget amendments for our legally adopted budgets (i.e. General, Debt Service, and Food Service Funds) are made prior to your fiscal year-end. I can’t believe that June 30th fiscal year-end school districts only have less than three months to amend their budgets.

There are a few sleeper transactions that can creep up on you and create budgetary compliance issues in the annual financial report. Here are few:

  1. TRS On-behalf – Both the expenditure and revenue budgets need to be adjusted. Your financial software may be calculating this amount for you, but please verify that the system is using the correct formula. Focus on the primary functions such as Instruction (Function 11) where payroll is charged. Remember that TRS On-behalf is only recorded in the General Fund. It should not be recorded in any Federal fund.
  2. Bond Refunding and New Bond Issuances - When refunding bonds are issued, the proceeds are placed in escrow. I think school districts focus on the Other Financing Resources (Object 791x) and Other Financing Uses (Object 8949) and don’t expect any budget implications at the functional level. In addition, because the transaction typically doesn’t require a cash outlay, it all happens behind the scenes and can be easily forgotten altogether. Remember that these transactions come with bond issuance costs that must captured in Function 71, object 6599. Please make sure that your Debt Service budgets are adjusted for such transactions. For new bonds, we have to make sure that all components of the bond issuance are recorded (i.e. bond proceeds, bond issuance costs and premiums).
  3. Federal Interest Subsidies – The federal government will assist school districts with interest subsidies for their Build America Bonds (BABs). The payments received from the federal government must be recorded in 5949 and the corresponding interest due must still be recorded in function 71, object 6521. The transactions should not be netted because this is of interest to the financial statement users. Please note that the interest subsidy, although recorded in a federal object code, is not included in the Schedule of Expenditures of Federal Awards (SEFA). It will simply be a reconciling item between the SEFA and total Federal revenues reported in the annual financial report.
  4. GASB No. 87, Leases – We’ve been immersed in identifying what constitutes a lease, but now is the time to ensure that your budgets are sufficient to capture the lease transactions in the proper functional category. Remember that new leases must be recognized at the fund financial statement level. Paragraph No. 36 of this standard states, “An expenditure and other financing source should be reported in the period the lease is initially recognized. The expenditure and the other financial source should be measured as provided in paragraphs 21-23. Subsequent governmental fund lease payments should be accounted for consistent with principles for debt service payments on long-term debt.” Many school districts forget to record the initial lease because there is no associated cash outlay. However, this journal entry is needed to reflect the transaction and facilitate right-to-use asset and lease liability recognition at the government-wide level during the accrual conversion process. Also, note that the guidance for initial recognition has existed in the Texas Education Agency (TEA) Financial Accountability System Resource Guide (FASRG) for many years. (See FASRG Module 1 Section C.6.3).

The second part of paragraph 36 of GASB No. 87 is also important. It states that subsequent lease payments will be recorded as debt service expenditures. The TEA has confirmed that we can continue to use the “capital lease” other financing resource object code 7913 and the principal and interest expenditure object codes 6512 and 6522, respectively. Those object codes will only use the term “leases” versus “capital leases.”

    The following example illustrates the initial recognition at the governmental fund financial statement level as well as subsequent payments. Let’s say that your school district entered into five-year lease agreement for a piece of equipment. The school district has determined that the present value of the equipment is $20,000, it will be used in the facilities and maintenance department (Function 51), and payments will be made from the General Fund. The journal entry to record the initial recognition would be as follows:

    • 199-51-6639 $20,000 (Debit)
    • 199-00-7913 $20,000 (Credit)

    The school district is also required to make annual principal and interest payments. As such, the school district will record the payments on the lease as follows:

    199-71-6512 $4,000 (Debit)

    199-71-6522 $500 (Debit)

    199-00-1110 $4,500 (Credit)

    Given this example, the school district needs to make sure that it has sufficient budget in function 51 only in the year the school district enters the lease. That is, the initial recognition is a one-time transaction. The principal and interest payments, however, must be budgeted in function 71 each year until the lease expires.

    Three months seem light years away, but fiscal year-end will here before we know it. Also, be sure to look into your crystal ball for any attendance hold harmless, ESSER Reduction, state supplanting, adjustments. Just kidding. Reach out to us if you have any questions on these time-sensitive topics.

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