Creating a Balanced Budget for School Boards: Aligning Education Act with PSAB

1. PUT TITLE HERE Defining a Balanced Budget for School Boards OASBO Finance Committee Workshop Transfer Payments & Financial Reporting Branch March 2008

2. Purpose & Rationale Purpose: • To propose changes to the Education Act pertaining to the definition of a balanced budget. Rationale: • Accounting standard changes • Education Act definition is still on cash basis • Boards maintain 2 sets of books - PSAB vs. Compliance • The Act, which focuses on cash, influences behaviour and as boards are consolidated this behaviour impacts the bottom line on the provinces books.

3. Task To move the school board sector to a definition of balanced budget based on PSAB GAAP Appropriate controls on DSB expense including amortization AND Appropriate controls on capital expenditures and financing Annual = Surplus / Deficit Change in Net Debt = & Cash Flow

4. Timeline January - March 2008 Briefings - Ministry - Reporting Entity - COSBO, OASBO June – August 2008 Prepare Options Consultations Forms design October 2008 Legislation Changes Nov – Dec 2008 Prepare Final Forms & Training Materials January – March 2009 Training & Education With central agencies and education stakeholders Provincial Road Show 2008/09 Financial Statements & 2009/10 Budget Implementation

5. Differences in Accounting Education Act • Reserves can be used to balance • Principal on debt service costs • Expense capital when purchased • Cash flow model Provincial Books / PSAB • Reserves are neither a revenue or expense • Amortization of capital assets • Capitalization/Amortization of TCA • Accrual model Since the definition of a balanced budget in the Education Act influences behaviour and it’s a cash flow model, aligning the Education Act with PSAB is important.

6. Proposed Model: Balanced Budget Compliance if: PSAB Surplus/Deficit +/- +/- “Deemed” Approvals/Adjustments (eg. Allowing use of operating reserves) +/- +/-Ministry Approvals/Adjustments (eg. Allowing transfers from capital reserves) = 0 Alternative description of the same concept: DSB Net Expense Limit = Allocation + Exceptions (Deemed approvals + Ministry approvals)

7. Issues to be considered Operating Related • Employee Future Benefits • Vacation and Interest Accruals • Operating Reserves Capital Related • Amortization vs. Principal Payments • Amortization of Furniture & Equipment • Capital Type Revenues • School Renewal Grant • Pupil Accommodation Reserves

8. Principles / Criteria • Each of the issues and proposed changes are analyzed against the following two principles: 1) Their consistency with PSAB requirements 2) Where we are deviating from PSAB, does the exception a) align the financial behaviour of the boards with the province or b) have appropriate controls to minimize the risks to the province • Each ‘exception’ moves us further from the PSAB surplus / deficit

9. 1. Employee Future Benefits • PSAB requires that benefits expenses such as retirement benefits and post employment benefits be recognized as employees provide services • The liabilities are actuarially determined and representthe portion of the estimated obligation for future payment of benefits attributed to services rendered to-date • The current balanced budget compliance determination is based on the cash expense and does not reflect the obligation for future benefits • There is currently an estimated gap of $90M

10. 1. Employee Future Benefits… Option 1: Status quo – exception to reverse the expensed amount back to the cash amount. • Does not encourage DSBs to manage the PSAB expense • Risk as DSB “expense” is different from the consolidated expense Option 2: Adjust grant and require boards to manage the PSAB expense as determined by the actuarial studies • DSB Expense = Consolidated Expense • DSBs will be encouraged to manage this expense when negotiating benefits in collective agreements • Requires the Ministry to fund the PSAB expense

11. 2. Interest & Vacation Accruals Current compliance is based on: • actual cash interest payment on debt • vacation expense for actual vacation time taken PSAB requires: • accruals to be recorded at year-end for expenses incurred during the period but not yet paid out • expenses to be recorded in the year in which the vacation is earned

12. 2. Interest & Vacation Accruals Option 1: Status quo - exception to reverse the in-year accrued amount back to cash amount • Does not encourage DSBs to focus on the PSAB expense Option 2: Do not make any adjustment for these amounts • Requires the board to address the current year expense only • The in-year PSAB expense is not significantly different from the in-year adjusted expense currently being reported by boards

13. 3. Operating Reserves • School boards have currently accumulated various levels of operating reserves • These reserves may be used to help boards offset prior year or future years’ deficits • These reserves may also be accumulated at times where boards are experiencing favourable year-end budget positions • The Ministry does not currently control the use of operating reserves or the transfers boards make to these types of reserves • The extent to which boards access those reserves in any one year has an impact on the province’s books

14. 3. Operating Reserves… Option 1: Status-quo • Provincial risk from DSB’s using reserves to offset deficits Option 2: No reserves (follow PSAB) • DSBs would be required to manage their PSAB expense • Promotes “end of year” spending spree behaviour • Would lead to volatility in school board balanced budget compliance Option 3: Limit amount DSBs may put into and/or accumulate in reserves • Would reduce provincial exposure from DSB’s using reserves to offset deficits while still allowing them to smooth their results to achieve compliance and avoid end of year spending Option 4: Limit amount DSBs may pull from reserves without a special approval • Would reduce provincial exposure from DSBs using reserves to offset deficits while still allowing them to smooth their results to achieve compliance and avoid end of year spending

15. 4. Amortization & Principal Payments • PSAB requires that amortization be recognized as an expense as tangible capital assets provide services through their useful lives • The current balanced budget compliance determination is based on principal and interest payments and does not reflect the amortization expense • There are considerable differences between principal amounts and amortization expense for individual DSB’s.

16. 4. Amortization & Principal Payments… Option 1: No Exception to PSAB Expense • DSBs would need to manage their amortization expense but their grant revenue is cash based • Large differences between Boards in the amounts of their amortization and principal payments. Option 2: Exception = Amortization less Principal • 2nd principle of aligning behaviour and limiting risk can be achieved by overseeing of capital expenditures and project approvals • New focus on the capital budget & project approvals • New focus on the remaining service life of assets – particularly for School Renewal expenditures

17. 5. Amortization of Furniture & Equipment • We currently fund furniture and equipment in 2 ways: • As part of the foundation grant for regular purchases / replacement of furniture & equipment • As part of the new pupil places grant to cover furniture & equipment for “first-time school equipping” • As part of our TCA guide, we are requiring boards to set up furniture & equipment as capital items where items purchased exceed $5,000 per unit or where there is a first-time equipping of a new school or addition. • For regular F & E, averaged over time, the funding will be comparable to the amortization expense. • For first-time equipping, the funding will not align well with the amortization expense.

18. 5. Amortization of Furniture & Equipment… Option 1: No exception from PSAB surplus/deficit • DSBs would need to manage their amortization expense but their grant revenue for first-time equipping is not well aligned with the expense. Option 2: Exception for first-time equipping only • Creates matching of budget compliance with funding • Consistent with 2nd principle of minimizing risk

19. 7. School Renewal Grant • The current funding for school renewal includes two components: • Small renewal / maintenance - operating type expenditure • School renewal - capital type expenditure (subject to amortization) • As the grant includes both components, it makes it difficult to project how the funding for school renewal will be spent by the sector and this therefore creates a risk to the province • The Ministry has attempted to minimize similar risk on the GPL program by instructing boards that GPL funding (part of the school renewal grant) must be used for capital expenditures only • Expansion of the GPL program may result in a higher proportion of the regular renewal program to be spent on expenditures of an operating nature

20. 7. School Renewal Grant… Option 1: Status quo – no changes to grant structure • Could create significant differences between the amortization expense and the grant revenue recorded by DSB’s. • This could create surpluses in early years and deficits later Option 2: Split funding into operating component and capital component • Capital component could be part of GPL with a funding approach that takes into account remaining service life • Assets with lower remaining service life should require more investments than assets with relatively higher remaining service lives • Operating renewal needs should be met from current funding • Board’s that have encumbered or committed renewal could pose a problem

21. 8. Pupil Accommodation Reserves • School boards have currently accumulated various levels of pupil accommodation reserves • Some of these reserves are ‘committed’ for projects that have yet to be undertaken • As the funding model for capital projects is being reviewed, EDU may be moving more to a project based approval and OFA long term financing approach

22. 8. Pupil Accommodation Reserves… Option 1: Apply the reserves against the debt servicing cost (DSC) of existing capital debt • This will reduce ministry appropriation until reserves have been drawn down. • May be complex to implement within the concept of balanced budget from a legislative point of view since reserves are being drawn down and applied against part PSAB expenditure (interest) and part capital debt reduction (principal component of DSC) Option 2: Apply reserves against capital costs only (i.e. against approvals for capital projects such that the amount that will be OFA financed on the projects will be net of reserves) • There is no implication on PSAB surplus/deficit since the reserves are being used for capital assets, the amortization of which will be reflected as expense on the PSAB statement of activities • Reserves that have accumulated for a specific board is retained for future capital investment for the board • Reserves draw against capital project approval is already in place against some existing program (growth projects)

23. Illustrative example - Compliance Position

24. Illustrative example - Net Expense Limit