Increasing the transparency of districts’ financial reports

School finance systems are complicated, often controversial, and subject to a certain amount of speculation. Are public schools “overfunded” or “underfunded”? Are they wasting precious taxpayer dollars or putting them to effective use? From which sources are they receiving their funds, and what strings might be attached? Are our public institutions on solid financial footing, or are they in dire straits?

These are fundamental questions that parents and taxpayers have every right to ask and to which they’re owed clear answers. One crucial disclosure is a district’s statement of revenues and expenditures—akin to a business’s income and expense statement. This report describes how a district raised revenue and how it spent those funds during the past fiscal year.

But you may be surprised to learn that the state revenues received and transferred to charters are also included in a district’s financial statement. You wouldn’t know it by simply looking at the statement: Consider, for example, the statement of revenues and expenditures for Cincinnati City Schools in the figure below.

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You’ll notice that the presentation doesn’t clearly display the $57 million received to educate Cincinnati charter students; nor is it evident how the district posts the corresponding expense. (The $57 million figure is retrieved from Cincinnati’s district payment report for FY 2014.)

But the funding to educate Cincinnati children attending charters is actually rolled into the district’s “Intergovernmental – State” revenue line item (highlighted). Meanwhile, the corresponding expenditure for the charter transfer is reported as a “Regular Instruction” expense—also highlighted. (The expense falls under Uniform School Accounting System code 001-1190-478, “Payments to a Community School.”)

One might ask: Is a proper disclosure made in the district’s notes to the financial statements? Unfortunately, nowhere is there even a footnote on the revenue and expenditure related to charters. Worth noting is that other financial statements lack documentation on the charter pass-through as well (see here and here for Columbus and Dayton’s respective financials).

A district isn’t responsible for educating charter students, so in my view, it’s misleading to include the charter revenue and expense on districts’ financial statements without any disclosure. Some might incorrectly conclude, for example, that Cincinnati Public Schools raises over $616 million to educate CPS students when, in fact, it’s more like $540 million (including the charter and other choice-related transfers). The present accounting method could also be used to artificially inflate a district’s “Regular Instruction” expenditures as a fraction of overall expenses, which might be desirable if someone wanted to show that more dollars are being used on instruction and not administration.

To be clear, districts are not at fault. Rather, it’s an issue with state policy whereby charters—entities that are generally[1] legally separate from a district—receive funding via district pass-through. So here’s a modest proposal to improve financial transparency on the district reporting side: State policy makers should require districts to include at least a financial footnote affirming the inclusion of charter transfer funds in their statements of revenues and expenditures (and the amount). This would greatly aid readers’ interpretation of the financial data.

Perhaps it is also time to determine a way to move charter schools off the district accounting books altogether. As public benefit organizations independent of district administration and oversight, charters shouldn’t distort our view of district finances. Budget analysts, taxpayers, and citizens deserve a clear view of the share of public funding being spent in the classroom, a calculation that cannot be done easily so long as the charter pass-through is booked entirely as an instructional expense. By removing the charter funds passing through the district, taxpayers and citizens can review district documents confident that they truly reflect its financial position.