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					                                          Board of Governors
                                    California Community Colleges
                                           March 5-6, 2007


  REQUESTS FOR EXEMPTION FROM                                                            3.1
  THE FIFTY PERCENT LAW
  ACTION SCHEDULED
  Presentation:   Frederick E. Harris, Assistant Vice Chancellor
                  College Finance and Facilities Planning




Issue
This item presents requests from three community college districts for an exemption from the
“Fifty Percent Law” (Ed. Code § 84362).


Background
Three community college districts did not meet the basic requirements of the Fifty Percent (50
Percent) Law for fiscal year 2005-06. The districts are Copper Mountain, Napa and Redwoods.
All three districts applied for an exemption.

Education Code section 84362, commonly known as the Fifty Percent Law, requires each
community college district to spend at least half of its “current expense of education” each fiscal
year for salaries and benefits of classroom instructors.

Current Expense of Education generally includes the unrestricted general fund expenditures of a
community college district. Excluded from the current expense of education are expenditures for
student transportation, food services, community services, lease agreements for plant and
equipment, and other costs specified in law and regulations. Amounts expended from State
Lottery proceeds are also excluded.

Salaries of Classroom Instructors are described in the California Community Colleges Budget
and Accounting Manual as “Expenditures for the full or prorated portions of salaries of all
employees in contract or regular faculty positions.” This includes the following expenditures:

           Prorated salaries of contract or regular instructors working a reduced load or whose
            assignment includes both instructional and noninstructional duties.

           Prorated salaries of administrators having a teaching assignment as part of their
            regular work assignment.
2       Item 3.1



           Salaries of instructors on sabbatical leave.

           Extra duty days or assignments paid as part of an instructor’s regular salary.

           Salaries of instructors with a dual-employment relationship.

           Instructional aides employed to assist instructors in classroom instruction tasks during
            any portion of their duties.

           Applicable staff benefits.

Title 5, California Code of Regulations, sections 59200 through 59214, prescribe the
requirements and procedures a district must follow in applying for an exemption from the fifty
percent requirements.

Administering the Law

The responsibility for administering the 50 Percent Law resides with the Chancellor and the
Board of Governors. Upon receipt of an application for exemption, System Office staff
determines whether applicable procedures have been followed, analyze supporting
documentation and data, and make recommendations to the Chancellor for presentation to the
Board. An independent assessment of each district’s computation of compliance is also a
requirement of the annual audits conducted by contracted independent audit firms pursuant to
Education Code section 84040. Every year, exemption application forms and applicable due
dates are distributed to all districts, and the annual financial and budget reports of all districts are
monitored for compliance with Education Code section 84362.

Districts not achieving the required 50 Percent and failing to apply for an exemption, or failing to
complete the application process, are still subject to the terms and conditions of the regulations.
However, these districts are not eligible for consideration of an exemption and must retire any
deficiency within the required time.

Basis for Exemption

A district may request exemption from the 50 Percent requirement if compliance would have
resulted in serious hardship or if salaries of classroom instructors are higher than comparable
districts. Serious hardship includes four criteria, defined in section 59204(c) and summarized
below:

       Conformance with the 50 Percent requirement would have resulted in the district’s
        inability to discharge financial liabilities. Consideration must be given to the size of the
        district’s general fund ending balance and the amount of credit base FTES.

       The first year of infusion of new moneys resulted in the district’s inability to comply with
        the requirements of the Fifty Percent Law. The percentage is recalculated without


Requests for Exemption from the Fifty Percent Law
                                                                                     Item 3.1        3


       including these new moneys in order to determine if the district would have been in
       compliance.

      Unanticipated, unbudgeted, and necessary expenditures resulted in the district’s inability
       to comply with the Fifty Percent Law. Litigation, arbitration, costs of energy, insurance
       and security are among the items to be considered.

      The district has expended funds for other than salaries of classroom instructors and has
       the agreement of the faculty representative that these expenditures are necessary, as
       itemized in title 5, section 59213(f).

Districts with salaries higher than the average of comparable districts are eligible for an
exemption for the incremental difference times the district’s workload (title 5, §§ 59204(e) and
(f)).

The contract district audit is reviewed for findings and to confirm the accurate reporting of the
amounts eligible for consideration in determining compliance with the Fifty Percent Law. The
System Office Contract District Audit Manual states “A reportable condition exists if the district
does not meet the 50 Percent minimum.” (section 400, page 400-3) The audit for 2005-06 was
due December 31, 2006.

Title 5, section 59211 specifies that the Board of Governors has the responsibility to deny, grant
or grant in part a district’s application. Exemptions are limited to: (1) the amount a district
exceeds expenditures for salaries of classroom instructors per FTES of the average of
comparison districts or (2) an amount needed to avoid serious financial hardship.

Four-Year Cycle for Compliance

Under the regulations, the correction of non-compliance takes up to four years:

1. Fiscal Year 1—(in this case, 2005-06) year in which the deficiency occurred.

2. Fiscal Year 2—(2006-07) year during which the System Office staff evaluates applications
   for exemption and the district is to begin to resolve the deficiency from 2005-06. The Board
   of Governors makes its decision on an exemption request. The Chancellor requires any
   district not granted a full exemption to prepare a plan for spending the unexempted
   deficiency on salaries of classroom instructors during the next fiscal year. The district must
   submit the plan by June 30, 2007.

3. Fiscal Year 3—(2007-08) year in which the district completes, by June 30, 2008, the
   resolution of any remaining deficiency from 2005-06. Any amount expended for salaries of
   classroom instructors above 50 Percent of current expense of education during fiscal years
   2006-07 and 2007-08 may be applied to reduce any unexempted deficiency from fiscal year
   2005-06.




                                                      Requests for Exemption from the Fifty Percent Law
4        Item 3.1


4. Fiscal Year 4—(2008-09) year in which the Chancellor withholds from the district’s
   apportionments an amount equal to any remaining unexempted deficiency from 2005-06.
   The withheld amount is redistributed among all districts statewide through the apportionment
   process.

Analysis of Districts and Chancellor’s Recommendations

Three community college districts did not meet the basic requirements of the Fifty Percent Law
for fiscal year 2005-06 based on the annual financial and budget report (CCFS 311). Copper
Mountain, Napa and Redwoods applied for exemptions and completed the required procedure.
Attachments A-C provide the details of each district’s situation.

Copper Mountain reported a shortfall of $556,703.             The Chancellor recommends a full
exemption.

Napa Valley reported a shortfall of $325,971. The Chancellor recommends a partial exemption
of $120,355, retiring the remaining unexempted amount of $205,616 by June 30, 2008, and
submittal of a recovery plan to the System Office by June 30, 2007.

Redwoods reported a shortfall of $379,846. The Chancellor recommends a full exemption.


Recommended Action

        That the Board of Governors grant the Copper Mountain Community College District a
         full exemption of $556,703.

        That the Board of Governors (1) grant the Napa Valley Community College District a
         partial exemption for $120,355, (2) that the remaining $205,616 be added to the district’s
         salaries of classroom instructors by June 30, 2008, and (3) direct the district to prepare a
         plan by June 30, 2007 for retiring the unexempted deficiency.

        That the Board of Governors grant the College of the Redwoods a full exemption of
         $379,846.


Staff:   Patricia Laurent
         Specialist, Fiscal Planning and Administration




Requests for Exemption from the Fifty Percent Law
                                   ATTACHMENT A
 Analysis of Copper Mountain Community College District’s Application for
                    Exemption from the 50 Percent Law
                           2005-06 Fiscal Year


Deficiency Calculation
1. 2005-06 Current Expense of Education (CEE)                                   $7,541,950

2. 2005-06 50 Percent Expenditure Requirement                                    3,770,975
3. Actual Amount Expended                                                        3,277,443
4. Total 2005-06 Deficiency                                                      $ 493,532

5. Amount Eligible for Exemption                                                 $493,532
   Amount Not Eligible for Exemption                                                   $0


Analysis
During 2005-06, Copper Mountain Community College District spent 43.5 percent of its current
expense of education on salaries of classroom instructors, a deficiency of $493,532. This is the
seventh year that Copper Mountain has submitted an exemption application. The district was
established in 1998. The contract district audit confirms that the district did not meet the 50
Percent requirement.

In accordance with title 5, section 59208, the governing board of the district held a public
hearing to determine the basis for the district’s application for exemption. The governing board
determined, pursuant to title 5, section 59204(c)(4), that the basis for requesting an exemption is
the district’s financial condition.

Specifically, the district determined at the October 12, 2006 public hearing with the local board
of trustees that redirecting $493,532 to salaries of classroom instructors would have required
termination of classified and management staff essential to the continued success of the students
at Copper Mountain College. In addition, the District had a decline 149 full-time equivalent
students (FTES) during fiscal year 2005-06.

Last year, this district received direction from the Board of Governors to show progress toward
achieving 50 percent beginning with fiscal year 2006-07. The district has made some progress
during 2005-06, moving from 42 percent for 2004-05 to 43.5 percent for 2005-06. The district
will use a set of guidelines developed in cooperation with district faculty to continue to improve
its performance on the 50 Percent Law.
2       Item 3.1


These long-term guidelines declare the intent of the district to hire a net increase of two full-time
faculty members per year and maintain a 5 percent financial reserve. These guidelines received
the endorsement of the local Board of Trustees, the local Academic Senate and the Faculty
Association. Beginning with the financial reports for fiscal year 2006-07, the System Office will
include in any consideration of an exemption application by the district, or a statement of
opposition to an exemption application by the faculty, the district’s progress in meeting these
guidelines.


Conclusion
Based on the district’s exemption request and supporting documentation, the district is eligible
for a full exemption on the basis of serious hardship, which is supported by the fact that
expenditure of an additional $493,532 on salaries of classroom instructors would have required
terminations and/or layoffs of classified and management/administration staff, making the
district unable to discharge its financial obligations.


Recommendation
That the Board of Governors grant Copper Mountain Community College District a full
exemption for the $493,532 deficiency for 2005-06.




Requests for Exemption from the Fifty Percent Law
                                   ATTACHMENT B
               Analysis of Napa Valley Community College District’s
                       Compliance with the 50 Percent Law
                                2005-06 Fiscal Year


Deficiency Calculation
1. 2005-06 Current Expense of Education (CEE)                                $24,477,970

2.   2005-06 50 Percent Expenditure Requirement                              $12,238,985
3.   Actual Amount Expended                                                  $11,913,014
4.   Total 2005-06 Deficiency                                                   $325,971
5.   Amount of district exemption request                                       $141,660

6. Amount Eligible for Exemption                                                 $120,355
7. Amount Not Eligible for Exemption                                             $205,616


Analysis
During 2005-06, Napa Valley Community College District expended 48.67 percent of current
expense of education on salaries of classroom instructors, resulting in a $325,971 deficiency.
The district contract audit has not been received.

In accordance with title 5, section 59208, the governing board of the district held a public
hearing on December 14, 2006, to determine the basis for the district’s application for
exemption. The governing board determined, pursuant to title 5, section 59204(c)(4), that the
basis for requesting an exemption is unanticipated, unbudgeted, and necessary expenditures
resulting in the inability to expend 50 percent for classroom salaries.

Even though the district has a $325,971 deficiency, it chose to apply for an exemption of only
$141,660. First, the district settled an unanticipated personnel matter by agreeing to make a
$193,549 payment during 2005-06. Had the district not made this payment, the current expense
of education expenditures would have been $24,284,421, reducing the deficiency by $97,774.

Second, the district suffered significant flooding of campus property under contract for
installation of a photovoltaic field. This energy conservation project was scheduled to save the
district $30,108 a month in electric bills. The flooding delayed construction by six weeks while
the area dried out. This six week delay required the district to continue expending the additional
$30,108 for six weeks for electricity, resulting in an $45,162 expenditure. If this unanticipated
expenditure had not been necessary, the district’s current expense of education would have been
$24,432,808 and the 50 Percent expenditure requirement would have been $12,216,404 for a
deficiency reduction of $22,581.
2       Item 3.1


Third, the district was unable to offer a full complement of classes because of flooding. The
district estimates that 15 sections were cancelled, above the normal amount, during the flood,
resulting in the loss of 108.8 FTES. Subsequently, the district applied to the System Office for
consideration of these lost FTES. In fiscal year 2006-07 the district will receive apportionment
for these 108.8 FTES lost because of flooding. The district requests consideration for exemption
of $21,305 based on the unexpended faculty salaries and benefits associated with the 15
cancelled classes (15 sections represents 45 instructional hours per week, or 787.5 hours per
semester at a cost of $54.11 for salaries and benefits, or $42,611). The addition of $42,611 to
both the salaries of classroom instructors and current expense of education results in the $21,305
reduction of the deficiency.


Conclusion
Based on the district’s exemption request and supporting documentation, the district is eligible
for an exemption on the basis of unanticipated, unbudgeted and necessary expenditures for two
of the three items described above totaling $120,355. The expenditures to settle the personnel
issue and the additional six weeks of higher electric bills were unbudgeted and necessary.

However, the amount the district was unable to expend for faculty salaries because of cancelling
classes due to the flood does not represent unbudgeted and necessary expenditures. However, the
district will receive apportionment for the cancelled classes. Although the district’s dilemma
was clearly out of their control, the law does not include as a possible justification for an
exemption the inability to expend funds for salaries of classroom instructors due to unanticipated
cancellation of classes.


Recommendation
That the Board of Governors (1) grant Napa Valley CCD an exemption for the $120,355 of the
total $325,971 deficiency for 2005-06, (2) direct the Napa Valley CCD to add a total of $205,616
to the required amount spent for salaries of classroom instructors by June 30, 2008 and (3) direct
the district to prepare a plan by June 30, 2007 for retiring the unexempted deficiency.




Requests for Exemption from the Fifty Percent Law
                                   ATTACHMENT C
                Analysis of Redwoods Community College District’s
                       Compliance with the 50 Percent Law
                                2005-06 Fiscal Year

Deficiency Calculation
1. 2005-06 Current Expense of Education (CEE)                                  $25,826,030

2.   2005-06 50 Percent Expenditure Requirement                                 12,913,015
3.   Actual Amount Expended                                                     12,536,169
4.   Total 2005-06 Deficiency                                                     $376,846
5.   Amount of district exemption request                                         $379,846

6. Amount Eligible for Exemption                                                  $379,846
7. Amount Not Eligible for Exemption                                                    $0


Analysis
During 2005-06, Redwoods CCD expended 48.54 percent of current expense of education on
salaries of classroom instructors, resulting in a $379,846 deficiency. The contract district audit
failed to include confirmation of the 50 Percent Law problem and is being amended to include
this finding.

In accordance with title 5, section 59208, the governing board of the district held a public
hearing on December 8, 2006, to determine the basis for the district’s application for exemption.
The governing board determined, pursuant to title 5, section 59204(c)(4), that the basis for
requesting an exemption is the district’s serious financial hardship.

If the district had been required to redirect $379,846 to salaries of classroom instructors in order
to comply with the fifty percent law during 2005-06, it would have been required to terminate
classified and management staff essential to the continued success of students at the Redwoods
CCD.

Over the past four years, enrollments have continuously declined. Credit enrollments were 5,663
FTES in 2002-03, dropping to 4,928 in 2005-06. The first quarter 2006-07 financial report,
includes 4,405 FTES as an annualized estimate. During these four years, the Redwoods CCD
has made significant reductions in its non-instructional staff and has significantly reduced its
expenditures for part-time faculty. However, these efforts alone were not sufficient to offset the
loss of income due to declining enrollments.
2       Item 3.1


The district has been deficit spending since 2002-03. The district has reduced its ending fund
balance from a high of 15.7 percent in 2001-02 to 3.2 percent for 2005-06. Further, the district’s
first quarter 2006-07 financial report includes an ending balance of 2.9 percent.

In response to these conditions, the System Office, in concert with the district, is currently in the
process of reviewing the fiscal condition of the district pursuant to the 2005 Accounting
Advisory on Monitoring and Assessment of Fiscal Condition (FS 05-05).

The district’s academic senate submitted a resolution regarding the district’s exemption
application. The senate expressed support for the application for 2005-06 with the reservation
that if the district does not take action to meet the 50 Percent requirement, the senate will object
to an exemption request for 2006-07.

The district had a 50 Percent Law deficiency for 2003-04 of $143,516 and did not apply for an
exemption. The district was directed by the Board of Governors to retire the entire amount by
June 30, 2006, consistent with Education Code section 84362. During 2004-05, $12,777 of this
deficiency was retired. The district did not payoff this remaining deficiency of $130,739.
Therefore, this amount will be deducted from general apportionment and redistributed to districts
statewide.


Conclusion
Based on the district’s exemption request and supporting documentation, the district is eligible
for a full exemption on the basis of serious financial hardship. The expenditure of an additional
$379,846 on salaries of classroom instructors would have required terminations and/or layoffs of
classified and management/administration staff and reductions in operating expenses, making the
district unable to perform its financial obligations.


Recommendation
That the Board of Governors grants Redwoods CCD a full exemption for the $379,846
deficiency for 2005-06.




Requests for Exemption from the Fifty Percent Law

				
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