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Financial Accounting for Local and State School Systems, 2003 Edition

Account Classification Description
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Table of Contents
Uses of Information
Governmental  Accounting
Financial Accounting
Cost Accounting and Reporting for Educational Programs
Activity Fund Guidelines
Summary of Account Code Changes and other Appendices
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Frank Johnson
(202) 502-7362

Chapter 2: Uses of Information

This chapter defines the need for and advantages of a fiscal data system that is appropriately aligned with a comprehensive education information system. In addition, it describes useful applications of education information, in particular, information that can influence education management and policy decisionmaking. Finally, the chapter identifies frequent users of education information who can benefit from the kinds of data envisioned by this handbook.

Financial Reporting and a System of Education Information

Successful management of any large organization requires extensive and effective use of information. Information about education ranges from staff and student information to extensive financial information, which may also encompass school facility and program-level information. A comprehensive education information system can provide many benefits for education management:

  • Using data to influence decisionmaking. Good decisions are based on inquiry and analysis. Information technologies are available to make good decisionmaking possible for school-based administrators, as well as for external users of education information, such as legislators and patrons.
  • Using data to target specific areas for improvement. Timely and accurate data can help decisionmakers at all levels focus on improvement strategies.
  • Using disaggregated data to examine wide-ranging goals. Disaggregating data for analysis helps identify programmatic and fiscal inequities and determine what the baselines for improvement should be.
  • Using data in rapid program evaluation. To have an impact, program evaluation must be timely as well as complete. When program and other data are compiled and linked in an accurate and well-designed retrieval system, the goals of schooling can be more effectively and efficiently met.
  • Using data for budgetary control. Greater control and more informed decisionmaking are possible when all costs of school operations are available.
  • Using data to examine relationships between cost and effectiveness. Information technologies allow graphic representations of these data.
  • Using data to improve administrative time management and mandated reporting. When core databases are built around the NCES Common Core of Data Elements, improvements in administrative efficiency and time management can be significant.
The benefits of an extensive data system are especially apparent in the relationship between programs and costs. For appropriate, cost-effective, and timely decisions about students and schools and programs to be made, accurate and complete information must be widely available to the many users of education data, such as the research community, school administrators, school boards, policymakers, school improvement teams, creditors and potential creditors, and the general public. The advantage of a comprehensive education information system to school finance is that it allows a complete, accurate, and timely display of the distribution and use of resources, with direct educational program implications. At a time when significant questions are being raised about spending on schools, a more comprehensive data system has real value in its potential to uncover the answers to these questions. Because education finance has such an important impact on society, it is a central focus of policy debate and decisionmaking at all levels of government-processes that are greatly hampered without a uniform data system.

The value of a comprehensive data system is further evident in examining the distribution of resources (fiscal equity) and the use of those resources (productivity)-two of the major foci of school financial accounting information. Since 1971 (Serrano v. Priest 487 P.2d 1241 [1971]), legal challenges to state school finance systems have required states to revise funding formulas to better ensure equitable funding among school districts, and those same challenges have forced states to attempt to define what constitutes an adequate education. The assumption that a more equal distribution of resources will lead to increased equity in the uses of finite resources continues to be debated-in the courts, in the media, and among the general public.1

School financial accounting systems are an important source of information for measuring the costs of an equitable and adequate education in each school district. Recently, the emphasis on accountability has turned the spotlight on achievement in schools, with adequacy and equity (expressed only in terms of resource inputs) no longer sufficient to satisfy legislators, taxpayers, parents, or members of the general public. The focus of much school financial information today is how much it costs to achieve a minimum acceptable level of educational performance for all students. The clear trend is to understand fiscal and programmatic data in terms of the particular need of specific groups, such as students with disabilities or limited proficiency in English or those who come from economically disadvantaged families (Reschovsky and Imazeki 1997, 144).

Although conceptually it is convenient to maintain a separate financial system with well-defined elements, most of the operational and policy questions that need to be answered in the modern era rely heavily on data that cross into other areas as well. To be useful, definitions of school financial data must align with other aspects of the education information system. An aligned and comprehensive education information system should provide the data necessary to answer questions about key areas of school finance:

  • How much is spent on education?
  • Who pays for education?
  • How are funds allocated?
  • How are educational resources linked to student achievement?
The ability to answer these questions demands a system of education information that comprises much more than just the finance component; in essence, an education information system should also include at least the student records system, the staff records system, the property system, the curriculum or program component, and the community services component. Instructional management systems can be (and frequently are) linked to student records systems to provide policymakers with greater analytical capability so that they can make the appropriate, cost-effective, and timely decisions expected in today's complex and competitive policy arena.

The data system needed to support these complex conditions argues for the need to benchmark data across time and argues for "best practices.These strenuous conditions place a premium on the standardization of information systems. Standardization is critical if the operations of one school district or state department of education are to be compared over time or with those of another, or if data from the operations of many school districts or state departments of education are to be consolidated for comparison.

One emerging policy issue that poses a major challenge for education information is the escalating debate on how to increase school productivity. Inadequate data have made it difficult to assess and evaluate educational productivity. Detailed financial information is necessary before an understanding of educational productivity can begin. But financial data that are not presented in the context of other important information will paint a very incomplete picture. An education information system with school finance data linked to student outcome indicators is essential to an understanding of how resources are being used and how they can be used more effectively.

At the federal level, for example, the National Center for Education Statistics (NCES) collects public education finance data through the National Public Education Financial Survey (NPEFS) and the School District Financial Survey (F-33). The NCES is the primary federal entity for collecting, analyzing, and reporting data related to education in the United States and other nations. The NCES is a branch of the Institute of Education Sciences in the U.S. Department of Education and is authorized to collect data by Congress through the Education Sciences Reform Act of 2002 (P.L. 107-279), 20 U.S.C. 9543.

The Common Core of Data (CCD) Survey started collecting data beginning with the school year 1981-82 survey collection. The NPEFS survey is part of the CCD. The F-33 survey is a U.S. Bureau of the Census survey, part of the Annual Survey of Local Governments. The NCES supports this collection effort to ensure that all districts are included in each year's collection. The data items on both surveys are based on the account codes presented in this handbook, and each item on the survey forms is defined through reference to the account codes presented here in chapter 6.2

The data collected from the NPEFS collection are used in the formula for allocating Title I and other federal grants to school districts, as specified under the authority of section 153(a)(1)(I) of the Education Sciences Reform Act of 2002 (P.L. 107-279), 20 U.S.C. 9543, which authorizes the NCES to gather data on the financing of education. The NCES collects data annually from state education agencies through NPEFS. In addition to finance data, the NPEFS survey also collects average daily attendance data. Average daily attendance is the denominator in the average state per pupil expenditure figures required by the Title I legislation. Because these data are used in the allocation formula, established deadlines, definitions, and editing procedures are rigidly enforced. Survey deadlines are announced in the Federal Register, and the definitions are based on the account codes and definitions presented in this handbook.

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Useful Information

The potential value of both extensive and useful data about education is enormous due to the magnitude of expenditures for education at the state and local levels. As measured in total funding or in number of people employed, education is the largest policy arena for state and local governments with growing interest at the federal level.

The demand of policymakers at the local, state and federal levels for quality and useful data and outcome measures to evaluate fiscal and programmatic policy changes drives the need for data systems to become more and more comprehensive. Data are constantly used to make decisions with immediate impacts and long-term implications. For example, financial reports of state and local education agencies are used to compare actual financial results with legally adopted budgets; assess financial conditions and results of operations; assist in determining compliance with finance-related laws, rules, and regulations; assist in evaluating efficiency and effectiveness of processes; and plan for the future. The GASB defines financial reporting as the means of communicating financial information to users (GASB Concepts Statement 1, Objectives of Financial Reporting, paragraph 32). For this communication to be effective, financial information must have the following basic characteristics (Governmental Accounting Standards Concepts Statement 1, Objectives of Financial Reporting, paragraphs 63 through 68):

  • Understandability. Information should be simple but not oversimplified. Explanations and interpretations should be included where necessary.
  • Reliability. Information should be verifiable and free from bias. It should be comprehensive; nothing should be omitted that is necessary to represent events and conditions, nor should anything be included that would cause the information to be misleading.
  • Relevance. There must be a close logical relationship between the information provided and the purpose for which it is needed.
  • Timeliness. Information should be available soon enough after the reported events to affect decisions.
  • Consistency. Once a principle or a method is adopted, it should be used for all similar events and conditions. If a principle or a method has changed, the nature and reason for the change as well as the effect of the change should be explained.
  • Comparability. Procedures and practices should remain the same across time and reports. If differences occur, they should be due to substantive differences in the events and conditions reported rather than arbitrarily implemented practices or procedures for data collection.
These standards imply wide uses of data and require carefully designed policies to help guide decisions about who uses a system of information (and how, why, and when they do so). Some policies are codified in law or regulations; others are official statements, executive orders, or agency directives. Government information policies are guided by two complementary, but sometimes conflicting, purposes: stewardship and usefulness. Stewardship encourages policies that regard government information as a public good, such as personal privacy and records management, whereas usefulness promotes policies that encourage the dissemination of information to improve the quality and lower the cost of government services, such as public access and interagency information sharing. Stewardship policies address confidentiality, information security, data quality and integrity, and long-term preservation of information. Usefulness policies address interagency and intergovernmental sharing, public access, public-private information partnerships, and reuse of information.

These issues are made more complex by the rapid technological advancements that further challenge traditional policies and generate new questions. The Internet, in particular, has fueled policy debates that were unimagined a decade ago, raising questions of appropriateness, privacy, and ethics. Local, state, and federal laws require that certain types of information (e.g., individual student and staff records) be protected from unauthorized release. Education information systems continually struggle to achieve balance so that under the best circumstances, the struggle results in higher quality data that are more useful for the general public and policymakers.

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Users of School Finance Information

For data collection to be purposeful and useful, it must fit the needs of its users. Users of school finance information may be divided into three major groups: those to whom the school districts and state departments of education are primarily accountable (the general public); those who directly represent the general public (legislative and oversight bodies); and those who lend or participate in the lending process (investors and creditors) (GASB Statement #1, paragraphs 35 through 37). These groups have different needs for these data, although all are concerned with the design and implementation of an entire educational system that is both programmatically and fiscally effective and efficient.

The General Public

One of government's primary goals is to promote the general welfare of all its citizens. Public education, although not mandated by the U.S. Constitution, is a response to the need for an educated public to participate in a representative democracy. One objective of the general public is therefore to purchase the maximum amount of service with a minimum amount of taxes. Therefore, to help fulfill a government's duty to be accountable, school financial reporting should help the general public determine whether its objective is being met.

As noted previously, defining and measuring school productivity and student achievement are exceedingly difficult. Mathematics and reading scores have long borne the burden of determining "productivity,but the reauthorization of the Elementary and Secondary Education Act of 2002 reflected a much broader range of concerns, including school readiness, graduation rates, and increased participation in higher education by minorities, as well as a host of social concerns, such as the cessation of drug use and violence. Although these aims cannot be perfectly quantified, a comprehensive education information system can help respond to the need of the general public to know what is actually going on in schools and how their tax dollars are being spent.

Although few in the general public will reflect at great length beyond the superficial aspects of the relationship between dollars spent and results produced, one subset of the general public consists of individuals whose scope and depth of interest in education data go far beyond that of the typical citizen. Education researchers (whether in government, universities, or schools) are at the "high demandend of the information-use spectrum. Their collective need for data is great and accordingly must be weighed against the cost of providing the data. At the same time, it is difficult to know ahead of time where the real payoffs will emerge. Fortunately, a well-designed and comprehensive information system that is populated by data that are valid, reliable, and timely and that provides reasonable access in a format that researchers can use will serve the specialized constituency and the broader public as research is translated into public policy.

Legislative and Oversight Bodies

At the local level, school administrators rely on financial information to evaluate past performance, to aid in day-to-day decisionmaking, and to inform the general public of the schools' resourcefulness and stewardship. Employees, particularly program coordinators but also classroom teachers and noninstructional employees, use financial information to plan budgets and to request additional funding or to redirect existing funds. Additionally, financial information embedded in a comprehensive education information system allows administrators to assess the areas of greatest need and plan how best to allocate education resources in the future.

In addition, school boards and other local governing units have both a responsibility for and an intense interest in the operation of the school system. The local school board is responsible for establishing policies and for overseeing and appraising the administrator as he or she carries out these policies. The school board thus needs timely warning of situations that may need corrective action. The board also needs information as a basis for judging both the efficiency of the administration and its effectiveness in complying with policies and restrictions. Some of this information can be provided by general purpose financial reports, but comparable information about other school districts is needed as a basis for informed comparison.

Other units of government also rely on information for policy directions. On average the U.S. Congress and state legislatures provide about half of the resources for the operation of school districts in the nation today, with the percentage even higher in some states. Accordingly, they need information on the schools' operation as a basis for deciding whether to commit additional resources, and how much. Additionally, governance units need cumulative information (in comparable format) about the operations of groups of school districts in order to formulate funding policies. To this end, legislators are interested in such data-based matters as

  • the ways in which local, state, and federal programs interact within specific operational areas;
  • profiles of school finance structures as they relate to tax resources; and
  • the impact (and cost) of programs resulting from specific legislative initiatives.
From this overview, it is clear that the defining characteristics of a useful accounting and data reporting system of interest to state and federal legislators are comparability of data, ability to achieve a variety of classifications, and timeliness in reporting.

Investors and Creditors

Finally, in governmental accounting, investors and creditors are considered to include bondholders and prospective bondholders, commercial banks, vendors, and others who have extended credit, or who are considering extending credit, to the school district. Typically, these data users are interested in the financial position of the school organization, its operating performance, and its likely sources and uses of funds as indications of the probability that the bonds or loans will be repaid in full and on time.

Investors and creditors need information about available and possible future financial resources, actual and contingent liabilities, and the overall debt position of an institution to evaluate the institution's ability to continue to provide resources for long-term debt service. They review operating results and cash flow data (both currently and over time) to look for trends that may indicate strengths and weaknesses in the ability of the government to repay debt. Trend analysis helps investors and creditors project future revenues and predict possible allocation of those revenues.

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All three user summary groups are interested in comparing original or modified budgets with actual results. For example, to assess accountability, citizens and legislative and oversight bodies want to ensure that resources were used in accordance with appropriations. Spending in excess of budgeted amounts may indicate poor financial management, weak budgetary practices, or uncontrollable and unforeseen circumstances. Underspending may indicate effective financial management by providing the necessary quality and quantity of services within the available appropriations. Situations in which actual expenditures are less than budgeted may also represent a decision by management to accumulate a surplus of resources for future use. A comprehensive education information system gives a broad view of budgetary concerns, rather than simply a "bottom line. As a result, this revision of the Financial Accounting for State and Local School Systems Handbook is intended to assist in the creation and improvement of a comprehensive data system that results in better academic and fiscal performance in America's schools.

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1 For an overview of court cases regarding education reforms, see"Overview and Inventory of State Education Reforms: 1990 to 2000" (NCES 2003–020).

2 Additional information regarding these surveys including instructions for completing them can be found on the Internet sites listed in appendix B.