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Finance
 Charter school financial management is complex and can
seem daunting, especially to new schools. Charter schools throughout
the state have mastered it, however. So don't let the complexity defeat
you.
As you move forward with planning and operating your school,
you will need expert help. The best place to start is with Charles Speiker
at the Minnesota Department of Education. He can be reached at
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or 651-582-8737. The Department offers extensive technical assistance,
including one-on-one tutoring, and many finance related workshops.
Despite their small size, starting and operating a successful
charter school is a challenging endeavor. In practice, each Minnesota
charter school is an independent school district, responsible for delivering
a quality education program while performing all the business and reporting
functions of larger, traditional districts. This can be a challenging
task for small schools.
The Charter Friends National Network, in their Guide
for Developing a Business Plan for Charter Schools, observes that
"charter school developers quickly realize that achieving their dreams
for changing and improving education requires more than innovative strategies
for teaching and learning. Charter schools have many of the same characteristics
of start-up small businesses and face many of the same challenges. The
greatest strategies for teaching and learning won't have a chance to
succeed if they aren't supported by fiscally and administratively sound
organizations."
It is critical that your governing board and administration
include people who are knowledgeable in school accounting and financial
management. Even when a school chooses to contract with a consultant
or management company for business functions, the board and director
must have a thorough understanding of the school's financial operations
and be prepared to evaluate the consultant's work. Ultimately, the governing
board is responsible for successful financial management of the school.
This responsibility cannot be delegated.
The information provided here is intended to be a basic
introduction to charter school financial management. This chapter includes
introductory information about the charter budget process, including
revenues, expenditures, contingency allocation, cash flow projections,
and budget balancing and approval. The chapter also includes information
about financial reporting.
Charter School Budgets
Effective financial management starts with a good budget. A realistic
budget is a critical management and accountability tool for charter
schools at every stage in their development - for schools that are still
in their planning phase and those that have been open for several years.
The process of establishing a budget forces schools to review and prioritize
programs and activities, helping them allocate resources to areas that
are key to academic success. Schools are encouraged to prepare several
budgets based on different revenue scenarios. This is especially important
during your first few years of operation, until your enrollment is stable.
It is important to have a good idea of where spending can be adjusted
if your revenue is lower than expected.
The operating budget at each phase of a charter school's
development is a reflection of the school's unique mission, vision,
priorities and strategies. Consequently, budgets will vary from school
to school. There are, however, basic tools and techniques that can help
schools with the budget process. In general, the process consists of
five fundamental activities: revenue estimation, expenditure distribution,
contingency allocation, budget balancing, and budget approval.
When developing budgets, new charter schools are strongly
encouraged to contact Charles Speiker at MDE (
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or 651-582-8737).
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The Budget Process
The budget process includes 5 steps: Estimate revenue,
estimate expenditures, establish
a contingency allowance, balance the budget,
and obtain board approval. While much of your funding
can be spent as you see fit on general operating expenses, many funds
are designated for specific purposes. When preparing your budget, you
should be mindful of any restrictions on the expenditure of revenue.
It is not enough simply to compare your total proposed expenditures
against your total anticipated revenue. Some funds can only be spent
on certain activities and it is important to know how much money is
available for which activities.
1. Revenue
Charter schools obtain revenue from a variety of sources, including,
for example, the state and federal governments, private foundations
and individual contributions.
a. State Funding. The bulk of a school's revenue will come
from the state government. The main sources of state support include:
(i) General Education Revenue
Minnesota Statutes 124D.11 stipulates that a charter school is eligible
to receive state aids, grants, and revenue according to Minnesota
Statutes as though it were a school district. However, charter schools
are not eligible for funds obtained by levy because they are not
geographically determined. (They do not have distinct geographical
boundaries like traditional districts do.) To simplify matters,
charter schools receive a statewide average general education payment
that is determined by "weighted average daily membership" (WADMs).
WADM is based on actual student attendance, multiplied by a weighting
factor that provides more money for students who are deemed to be
more expensive to educate. Currently, secondary students (grades
7-12) count as 1.3 WADMs; grades 4-6 count as 1.06 WADMs; grades
1-3 count as 1.115; and kindergartners as .557.
To estimate how much general education money a charter school will
receive, WADMs are multiplied by the state's basic aid allocation,
which is currently approximately $4,601 (the figure may vary slightly
because of regional differences). Under this formula, a charter
high school with 300 students will receive $1,794,390 in General
Education Revenue. (300 X $4601 X 1.3). A K-3 charter school with
20 students in kindergarten and 60 students in grades 1-3 will receive
$359,062. (20 X $4601 X .557 plus 60 X $4601 X 1.115).
(ii) Basic Skills Revenue
Basic Skills revenue is composed of compensatory revenue, Limited
English Proficiency (LEP) revenue and LEP concentration revenue.
Compensatory funds are intended to help schools with the additional
costs of serving children from lower-income families. A school's
eligibility for this revenue is determined by the students' eligibility
for free and reduced-price school meals. The number of students
with limited proficiency in English determines the amount of LEP
revenue. Schools are advised to get help in calculating Basic Skills
revenue from the MDE charter school finance officer.
(iii) Transportation Aid and/or Reimbursement
Minnesota Statutes, Section 124D.10, subd. 16 gives charter schools
the authority to either provide their own transportation services
or to use the transportation services of the school district in
which they are located. If a charter school chooses to provide its
own transportation, it will receive the transportation aid, which
in fiscal year 2004 was $223 per eligible student. If the charter
school chooses to use district-provided transportation, the school
district providing the transportation will receive the transportation
aid. For budgeting purposes, it is important to note that the $223
is part of the general education basic revenue of $4,601, not an
addition to it. Charter schools that elect to have the district
provide transportation will only receive $4,378 in general education
basic revenue.
Charter schools must notify the districts in which they are located
of their transportation choice by July 1. If possible, the charter
school should notify the district by March 1 - earlier than the
date required by law. Approximately March 1, many districts begin
to develop bid specifications for their routes for the upcoming
school year. If the districts know that they must provide transportation
for charter schools, the additional routes can be included in their
route bid specification. For more information about transportation,
see the Transportation section of this handbook.
(iv) Facilities Lease Aid
Minnesota Statutes, Section 124D.11, subd. 4 allows charter schools
to rent or lease a building for the school and apply to the Department
of Education for lease aid funds for this purpose. Each school is
eligible to receive the lesser of (a) 90% of the approved
cost of the lease, or (b) the product of the pupil units served
for the current year times $1,200. Each fiscal year, the Department
of Education issues detailed instructions for charter schools to
make application for lease aid funding. For more information about
Lease Aid, see the attached memo from MDE.
(v) Special Education Revenue
Charter schools are reimbursed for actual special education expenditures
in the same way as school districts. In addition, charter schools
are permitted to bill the student's resident district for any special
education costs that are not reimbursed by the state minus any aid
received on behalf of each child. Special Education Revenue is generated
on a base year revenue formula of charter school expenditures incurred
in the second prior year. If there is no prior year special education
data (i.e. if the school is in its first four years of operation),
the revenue is computed using current year data. Beginning in their
first year of operation, charter schools are also eligible for Federal
special education funding.
(vi) Special Education Excess Cost Billing
By law, special education costs outside of the state formula are
borne by the student's resident district. If a charter school is
providing special education services to a student through the appropriate
use of the individual educational program (IEP), and the costs of
these services exceeds the monies available from the state special
education cost reimbursement and any other aid received on behalf
of each child, the charter school can bill the home district for
these excess costs. Detailed information about Special Education
billing is available through the Department of Education.
(vii) Student Activity Funds
Another source of revenues for schools is the funds gathered
from student activities. These funds can be generated by vending
machine sales at the school, by sales of t-shirts and memorabilia
or even ticket sales for school events. Funds that are gathered
from such activities belong to the school and must be accounted
for properly. MDE can provide guidance on the management of student
activity funds.
b. Federal Funding. Charter schools may also be eligible for
a variety of federal funding, including federal entitlement funds
and funds through various discretionary grant programs. A major source
of a charter school's start-up funding is provided through the Federal
Charter Schools Program, described below.
Federal Start-Up Aid. In addition to state funds, during
the three years following authorization, a charter school is eligible
to receive start-up funds from the federal government (the Federal
Charter Schools Program). Unless a school receives private funding,
the federal start-up aid will be its main source of support prior
to opening. (The state revenue described above does not begin until
July of the year that the school begins serving students.)
Upon receiving charter authorization, schools can apply for as
much as $450,000 in Federal start-up assistance. Schools apply to
MDE for these funds, as the state administers this grant. Currently,
these funds are available over a 36-month period, beginning with
a planning year grant of up to $150,000. Subsequent grants for operational
years 1 and 2 are also available in amounts up to $150,000 per grant.
There is no guarantee on the amount of money available from year
to year. These are "up-to" amounts that are based on the overall
Federal award to the state and the number of existing and new charter
schools approved during the grant period. Charters should anticipate
that it might take at least 3 months from the time their grant is
approved until funds are actually received. See the attached memo
from MDE for an overview of the Federal Charter Schools Program.
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2. Expenditure Distribution
The heart of the budget preparation process is the estimation of
operating expenditures for the coming year. The estimation process can
never be an exact science, but historical experience will inform the
process and help to improve the accuracy and usefulness of the budget.
The experience of other charter schools with similar programs can also
provide helpful information. The goal should be to estimate expenditures
as accurately as possible and to learn from prior estimation discrepancies.
A budget that reasonably reflects the financial activities of the charter
school is an effective tool for program managers and the school's board.
The Department of Education will be able to provide you with sample
budgets. In estimating expenditures, schools should first think through
their budget assumptions and priorities. Important considerations include:
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Desired student-teacher ratio,
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Staffing configuration, including all critical and
desired positions (employees and consultants),
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Staff salaries and benefit packages,
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Building costs,
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Per student cost for instructional supplies, equipment,
field trips, etc.
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Office supply costs
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Communication costs (telephone, postage, internet)
Examples of expenditure categories include:
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Employment related expenses:
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Consultants
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Accounting/Audit
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Legal
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Communication services
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Building
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Lease costs
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Maintenance fees
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Security system
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Utility services expenses
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Equipment
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Lease costs
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Repair and Maintenance
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Postage and parcel
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Communication Services
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Insurance expenses
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Transportation contracts
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Travel, conventions and conferences
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Supplies - non-instructional
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Instructional supplies
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Textbooks and workbooks
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Field Trips
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Technology equipment
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Staff development
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Food Service
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Loans, interest
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Dues and memberships
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3. Contingency Allocation
Once the revenue and expenditure estimates of the budget are completed,
expenditure contingencies should be added to the budget. Allocating
a portion of fiscal year revenues for contingencies is an important
part of the budget development process. There is significant uncertainty
in financial planning and budgeting for charter schools, especially
schools in the first three years of operation. Enrollment may fall short
of projections. Costs can change with little warning. Operating budgets
need to allow for uncertainty.
Schools that have been open for a longer period of time will have less
need for contingency funds if they have accumulated a fund balance.
A fund balance acts like a savings account, providing the school with
a financial cushion for unanticipated costs or revenue shortfalls. However,
in the first years of operation and in schools with a negligible fund
balance, allocations to contingency costs are critical.
4. Budget Balancing
Once the separate revenue and expenditure portions of the budget
have been completed and the contingent expenditures have been added,
the total revenues and expenditures must be combined to provide a balanced
budget to the school board. Balancing the budget also includes establishing
a contribution to the Fund Balance (savings account) according to the
Fund Balance Policy determined by the school board. Most schools strive
to maintain a fund balance equivalent to 6-12 weeks of operating expense
or 8-12% of operating budget. This will be difficult for schools in
their first year of operation. First year schools should, however, budget
for at least a small fund balance.
If expenditures exceed revenues, there are two ways to balance the
budget: either reduce operating expenditures, or increase revenues.
One way to increase revenues is to work with the Department of Education
to ensure that you are receiving the maximum amount of revenues to which
you are entitled.
Another way to increase revenues is to seek government or private/foundation
grant money. Usually, grant funds are tied to special projects or one-time
expenses in schools. The grants may not help with the school's operating
costs, but can permit the school to develop new programs and initiatives
that it may be unable to fund without outside assistance.
Cash Flow Projections -- Also critical to the budget process
is the creation of a cash flow projection. A school could prepare highly
accurate revenue and expenditure estimates and still experience financial
difficulties because the timing of funds does not match necessary expenditures.
Ultimately, the financial condition of the school depends on the availability
of cash to meet financial obligations.
Cash flow issues for charter schools are complicated by the education
aids formula that pays a school only 80% of its revenues during the
current year of operation. The remaining 20% is paid out three to four
months into the subsequent fiscal year. In practice, this means that
a first year charter must survive the entire school year on only 80%
of its revenue.
This "hold-back" remains difficult for charters until they are able
to accumulate a fund balance. Many charters must obtain bridge financing
from a bank to carry them through times when the revenue flow does not
cover expenses. Banks will, of course, charge interest for bridge loans.
A format for cash flow projection is available from the Department of
Education.
5. Budget Approval
The final step in the budget process is to obtain board approval.
This generally involves demonstrating to the Board that the expenditures
are necessary to further the educational goals of the charter school,
that the revenues are reasonable and that the fund balance is responsible
given the school's circumstances. Balanced budgets are a key measure
of financial viability.
Once approved by the Board, the budget becomes an authorized tool of
the administration to manage the charter school. Using the budget, administrators
manage the charter school in a variety of ways throughout the fiscal
year, including: (1) monitoring program implementation, (2) controlling
expenditures, (3) tracking revenues, (4) adjusting expenditure plans,
and (5) reporting on fiscal operations. Used properly, an accurate budget
is an important management and communication tool for the school's administration,
board, and sponsor.
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Financial Reporting
To properly manage the financial health of the school, the Board needs
timely, accurate information. Required financial reports should be designed
that are easy to understand and contain all the important financial
information. The following are some of the typical reports used to assess
a school's financial position:
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Balance sheet - Provides a snapshot of the school's
financial status at a given point in time. It shows what is owned
(assets), what is owed (liabilities), and the balance of assets minus
liabilities. The resulting fund balance is often viewed as an indicator
of the school's financial health.
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Income Statement (Revenues and Expenditures) - The
income statement measures financial activity over a given period of
time. It shows how much is earned, spent, and what is left over.
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Cash Flow - The cash flow analysis presents an accounting
of revenues and expenditures by month and is useful for determining
if the school will experience cash shortages during the year
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Budget vs. Actual Revenues and Expenses - This report
shows the school's budget and its actual revenues and expenditures
and highlights where actual finances differ from what was anticipated.
This information can be an effective planning tool for subsequent
years of operation.
Examples of these reports can be found in the Financial Management
for Charter Schools: Policies and Procedures for Effective Financial
Accountability manual on the Center for School Change website.
Audited Financial Statements
Per Minnesota Statute 124.10, subd. 7(i), charter schools are required
to obtain an audit and audit opinion from a certified public accountant
for each fiscal year (the fiscal year ends on June 30 of each year).
The financial statements generated as part of the audit process are
similar to those viewed regularly by the board, but are considered final
once reviewed by the auditor and approved by the board. Charter schools
must budget for annual audit expenses.
RESOURCES
Charles Speiker, Minnesota Department of Education
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;
651-582-8737
Charter Starters: Governance and Management, LeadershipWorkbook 4 (Northwest
Regional Educational Laboratory, 1999). Includes sample budgets and
worksheets.
Minnesota Department of Education, Memo re Lease Aid (March 2004).
Minnesota Department of Education, Memo re Federal Charter Schools
Program (January 2004).
Financial Management for Charter Schools: Policies and Procedures
for Effective Financial Accountability (Center for School Change,
2004) (under construction).
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