Comptroller issues guidance for munis overseeing LEA budgets

The Comptroller’s Office of Local Government has issued guidelines for local governments who review the annual budgets of local school districts or systems.  

The recent memo presents 10 fiscal health principles for school districts, also known as local education agencies (LEAs) and local governments regarding LEA budgets. The principles reflect the expectations of the Comptroller’s Office and align with state law, federal funding requirements, and national best practices in government finance. 

The principles can be applied throughout the budget cycle – from initial planning through year-end review. Adherence to all 10 will strengthen fiscal decision-making, improve communication between entities, ensure that limited public resources are used effectively, and promote transparency, long-term planning, and sound financial management. 

In addition to LEA leadership – such as finance officers, directors of schools, and school boards – these fiscal principles can also guide local government officials who review, approve, and oversee local budgets.  

Develop A Multi-Year Budget Plan 

Budgets are created on an annual basis, but they represent multi-year commitments. A forward-looking approach that projects revenues and expenditures at least three to five years ahead allows districts to anticipate challenges and plan for evolving needs.  

Aligning the district’s financial projections with the county or city’s broader fiscal plans fosters transparency and reduces friction during the budget process. As part of this, local governments should: 

• Request long-term projections from the district before approving budget increases. 
• Align school funding assumptions with debt and revenue forecasts. 
• Communicate early and regularly with the school board about local revenue projections and upcoming budgetary concerns that may impact the school district. 

Adhere to Fiscal Planning Timelines 

Timely and accurate budget submissions are essential for compliance with state law and for effective coordination between school boards and local governments. LEAs must follow statutory deadlines, ensure submissions match the budget approved by the local funding body, and remain aware of applicable changes in law.  

Local governments and LEAs must hold one another accountable for providing information, such as local revenue projections, and meeting deadlines. Local governments should: 

• Clearly communicate local government and state budget submission deadline requirements. 
• Hold school districts accountable to the communicated budget submission deadlines. 

Follow Best Practices for Fiscal Accounting 

Sound fiscal management depends on consistent adherence to state laws, internal accountability, and professional standards. Resources such as the Tennessee Budget Manual for Local Governments, Seven Keys to a Fiscally Well-Managed Government, and GFOA best practices support effective budgeting and financial reporting.  

Regular budget-to-actual reviews, accurate accounting data, and timely corrective action following audits help maintain transparency and public trust. Local governments should: 

• Require periodic budget-to-actual reporting from the LEA finance team for review by the budget committee. 
• Ensure budget hearings include a review of school district audit findings to reinforce accountability and highlight clean audits clean audits to build public confidence. 

Assess Maintenance of Effort Requirements and Communicate Potential Changes 

Maintenance of effort (MOE) laws require local governments to budget at least the same level of funding for K-12 education each year, preventing supplanting when state funding increases. Local governments may reduce funding below the MOE amount if an LEA is experiencing enrollment decline.  

In these situations, an LEA may request a second-level MOE test to confirm that the local government is budgeting at least the same funding per student as the previous year. Early communication between districts and funding bodies about funding allocations and enrollment trends helps ensure budgets meet legal requirements. Local governments should: 

• Understand your city or county’s financial obligation as it relates to local required match (the minimum amount of local funds required by the Tennessee Investment in Student Achievement (TISA) formula) and maintenance of effort funding (the minimum amount of funds that must be budgeted based on last year’s funding amount). 
• Request enrollment trend information from the school district to understand potential long-term trends and the implications for state and local funding obligations. 
• Maintain consistent communication with the LEA about official revenue projections and possible reductions in maintenance of effort, if applicable. 

Establish a Formal Policy on the Level of Unrestricted Fund Balance 

A healthy reserve supports creditworthiness, cash flow stability, and the ability to respond to emergencies or economic downturns. The Government Finance Officers Association recommends an unrestricted fund balance of at least two months of operating revenues or expenditures, though more may be prudent depending on local conditions.  

School boards should adopt a formal fund balance policy, coordinate with local officials, and avoid using reserves for recurring expenditures. Local governments should: 

• Monitor school fund balance trends in budget submissions. 
• Support policies that prevent the school district from having to consistently dip into their reserves to fund recurring operations, such as: 
• Adopting or reinforcing structurally balanced budget policies. 
• Engaging in joint long-term financial planning with the school district. 
• Maintaining local funding levels that keep pace with inflation, enrollment, and mandated cost increases. 
• Requiring replenishment plans when reserves are used for operational purposes. 

Monitor Key Enrollment Indicators 

Enrollment and other student data directly affects state and federal revenues and drives 
staffing and facility needs. Sound annual projections at multiple levels – grade, school, and zone – allow districts to plan for growth or decline. 

Reviewing census trends, birth rates, and housing development patterns further refines forecasts and supports long-term decision making. Local governments should: 

• Request updates from the school district about enrollment trends. 
• Incorporate enrollment trends into county planning for capital needs, debt issuance, and community growth patterns. 

Plan for Personnel Costs 

Personnel costs account for 70 to 80 percent of a typical district’s budget, making careful planning essential. Districts must consider compensation, benefits, staffing needs, and TISA salary adjustments, and work collaboratively across district and school-level leadership teams.  

Keeping local governments informed about projected personnel costs reduces surprises and supports responsible long-term commitments. Local governments should engage in ongoing discussions with school district leaders to better understand and monitor school district personnel costs and anticipate future budget requests from the school district. 

Strengthen Capital Planning 

Capital costs—such as facilities, buses, and technology—require long-term planning to avoid deferred maintenance or costly borrowing. A 10 to 20 year capital improvement plan aligned with enrollment trends helps prioritize investments and supports fiscal stability. 

Sharing facility usage and condition data and coordinating planning with local governments enhances transparency and reduces conflict over limited capital dollars. Local governments should: 

• Incorporate school needs into county capital improvement plans. 
• Require joint planning before authorizing new debt. 

Maintain Strong Internal Controls 

Internal controls safeguard public resources by ensuring accuracy, compliance, and proper documentation of financial activities. Segregating duties, requiring dual approvals, and maintaining written procedures reduce the risk of fraud and audit findings.  

Regular reviews and training reinforce accountability across the district. Regular assessments of internal controls are required by state law and federal regulations. Training reinforces accountability for internal controls across the district and other responsible offices, such as centralized finance offices that manage many of the financial internal controls.  

Local governments should request confirmation from the school board that district staff are exercising strong internal controls and receiving regular training 

Maximize Transparency to Build Public Trust 

Transparency requires providing clear, accessible, and timely budget information that the public and local governments can easily understand. Distinguishing between mandated and discretionary spending and using plain-language explanations, visuals, and public engagement helps clarify decision making.  

Sharing budget timelines, posting materials online, and blending financial and programmatic context strengthen credibility. Local governments should: 

• Request clarity from the school district on mandated versus discretionary costs. 
• Ask clarifying questions during school district budget presentations 

Further guidance on the budgeting process is available through the Comptroller’s website. Additional questions can also be directed to Tara Bergfeld with the Division of Local Government Audit at either Tara.Bergfeld@cot.tn.gov or at (615) 401-7730