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New Early Warning Bills Become Law

By Daniel L. Eyer / Jul 08, 2015

This week Governor Snyder signed the "early warning" laws, Public Acts 109-114 of 2015.  These "early warning" laws create additional reporting requirements for all school districts, intermediate school districts ("ISDs"), and public school academies ("PSAs") with a general fund balance of less than 5%. The laws also grant new authority to the State Superintendent of Public Instruction ("Superintendent"), the Department of Education ("MDE"), the Michigan Department of Treasury ("Treasury") and the State Treasurer ("Treasurer") to require the submission of a variety of plans and reports in the event that one of the above authorities finds that financial stress exists. .

I. PA 109

PA 109 requires school districts and PSAs to transmit the budgetary assumptions, such as the projected foundation allowance, membership, and expenditures per pupil used when adopting their annual budgets to the Center for Educational Performance and Information ("CEPI") before July 7 of each school fiscal year. Only school districts or PSAs that had a positive general fund balance of at least 5% of total general fund revenues for each of 2 most recently completed school fiscal years are excused from transmitting the assumptions. CEPI will provide a form for the submission of these assumptions.

PA 109 also creates the authority for the Treasurer to declare that the potential for fiscal stress exists within a school district, PSA, or ISD. This determination is based upon essentially any financial and enrollment data provided to any state department or agency. If the Treasurer declares that the potential for fiscal stress exists within a school district or PSA, the district or PSA has the option to establish a contract with an ISD to perform an administrative review of the district's or PSA's financial status.

If a district or PSA chooses not to contract with an ISD, or, for an ISD, if a declaration of the potential for fiscal stress is made, the Treasurer may require that the district, ISD or PSA submit periodic financial status reports in a form prescribed by the Treasury. The district, ISD, or PSA must also provide the Treasury with other financial data as requested, allow the Treasury to examine the district's, ISD's or PSA's books and records of account, and fully provide the assistance and information properly requested by the Treasury.

Alternatively, if the district or PSA enters into a contract for administrative review with an ISD, then the Treasurer shall not require the district or PSA to submit periodic financial status reports until two (2) years after the initial notification of the declaration. If the district or PSA enters into a contract with an ISD for administrative review, the district or PSA must provide full access to information and assistance to the ISD and its agents. Once the administrative review is complete, the ISD will issue recommendations to the district or PSA concerning steps that the district should consider taking to avoid a deficit. The district or PSA must implement these recommendations, otherwise the district or PSA is then subject to the periodic financial status reporting described above. Further, the Treasurer can require the district or PSA to submit periodic financial status reports if it determines that the district or PSA is not implementing one or more of the ISD's recommendations.

A PSA may also enter into a contract with its authorizer, and all of the same provisions will apply.

PA 109 also creates the authority for the Treasurer to require a district, ISD or PSA to submit an Enhanced Deficit Elimination Plan if the district, ISD or PSA fails to submit a required periodic financial status report; the Treasurer determines that fiscal stress exists, based upon a periodic financial status report; or a deficit has occurred, or is projected to occur with the current or next fiscal year and that the district, ISD or PSA lacks the capacity to address the deficit without state assistance.

Finally, if a district is required to submit periodic monthly status reports and a loan is issued to the district or PSA under the Emergency Loan Act, 1980 PA 243, MCL 131.931 et. seq., then the district is required to submit periodic financial status reports for up to four years after the date of issuance of the loan.

II. PA 111

PA 111 prohibits districts, ISDs and PSAs from operating under deficit budgets. If a district, ISD or PSA does so, the district, ISD, or PSA must submit an amended budget and a Deficit Elimination plan, and the MDE may withhold state aid payments until the plan is approved. The district, ISD, or PSA  must also submit monthly monitoring reports.

PA 111 also states that if the Treasurer determines that a district, ISD or PSA is subject to rapidly deteriorating financial circumstances or persistently declining enrollment, the Treasurer may require the district, ISD or PSA to submit an Enhanced Deficit Elimination Plan. Alternatively, the Treasurer must require the district, ISD or PSA to submit an Enhanced Deficit Elimination Plan if its initial Deficit Elimination Plan has not eliminated the deficit after five years. If the a district, ISD or PSA is required to submit an Enhanced Deficit Elimination Plan, the district, ISD or PSA must also submit enhanced monthly monitoring financial data reports. Finally, if a district, ISD or PSA is required to submit an Enhanced Deficit Elimination Plan, some or all of the state school aid funds may be withheld

As a condition of approving the Enhanced Deficit Elimination Plan, the Treasurer may require the district, ISD or PSA to enter into a Financial Recovery Agreement with the Treasurer, which will include assistance and guidance from the state, a financial plan, remedial actions to be taken, and the retention of auditors, inspectors, and consultants.

III. PA 112

PA 112 amends Section 102 of the State School Aid Act. It simply allows the MDE and the Treasurer to withhold some or all state aid payments to a district or ISD if the district or ISD is required to submit a Deficit Elimination Plan (see PA 111 above), or Enhanced Deficit Elimination Plan, and failed to do so or if the plan was not approved. 

IV. PA 114

PA 114 amends Sections 17a and 18 of the State School Aid Act and grants MDE the authority to withhold all or part of a payment that the district or ISD was entitled to receive to the extent that the withholding is part of a plan implemented under Section 1356 of the Revised School Code (which pertains to districts with an operating deficit borrowing and issuing its negotiable interest bearing notes or bonds for the purpose of funding the deficit). It also provides that an allocation of state school aid to the district or ISD is now contingent on a district's or ISD's compliance with sections 17a and 18, including the adoption of a budget that complies with the Uniform Budgeting and Accounting Act. Finally, it requires the district or ISD by November 1, 2015, to submit reports pertaining to per pupil costs for online learning.

V. PA 113

PA 113 amends the Local Financial Stability and Choice Act to allow the Treasurer to declare that a financial emergency exists within a district and recommend the appointment of an emergency manager if a district is subject to an Enhanced Deficit Elimination Plan (See PA 111 above) and failed to submit the plan or comply with it.

VI. PA 110

PA 110 amends the Local Financial Stability and Choice Act. It makes the Treasurer the "State financial authority" for a district subject to a Deficit Elimination Plan. It also requires the Treasurer to conduct a preliminary review to determine the existence of probable financial distress within a district if the district has failed to submit or comply with a Deficit Elimination Plan (PA 111 above) or if the district's Deficit Elimination Plan provides for the elimination of the deficit over a period exceeding 5 years. If either of those two conditions exist, this is prima facie evidence that probable financial stress exists for the school district.

Some of the new requirements, such as the submission of budgetary assumptions, will apply immediately and to most districts, ISDs, and PSAs. However, many of the requirements will apply only in specific situations, depending on the financial status of the district, ISD, or PSA. If you have any questions on this matter, please do not hesitate to contact your Clark Hill Education Attorney.