Meeting of the Board of Regents | February 2009

Sunday, February 1, 2009 - 11:00pm

A Report on the February 9, 2009 Meeting

Of the Regents Subcommittee on Audits

Your Regents Subcommittee on Audits met yesterday morning.

Counsel briefed the Subcommittee on actions taken to ensure that school districts cited in audits for non-compliance are taking appropriate actions to correct deficiencies. Specifically, we were briefed on follow up activities with three school districts involving mandatory Board training and the appropriateness of certain employee benefits.

The rest of the meeting was largely focused on recent audit findings including an audit of the Niagara Falls School District that identified weaknesses in controls over the payment of employee benefits. This is the second audit of Niagara Falls issued in the last four months. The other Office of the State Comptroller (OSC) audits discussed at the meeting related to school districts’ financial condition and the use of fund balance and reserves. The Comptroller’s audits reported that some districts have retained too much fund balance and in some cases the district cannot support the creation of, or funding of reserves. Staff provided a brief presentation on the concepts related to fund balance and reserves including terminology, components of fund balance, portions that can be legally retained, various reserve accounts and corresponding statutory authorization, and common audit findings cited by the Comptroller’s audits.

The Subcommittee was presented with 32 audits this month. All were issued by the OSC. The Department’s Internal Audit Workgroup identified thirteen audits for additional attention. We were briefed on 9 of the audits.

The findings were in the areas of procurement, cash, information technology, financial reporting, payroll, claims processing, conflict of interest, segregation of duties, and others, such as, control environment, use of reserves, sale of district property, student transportation services, and summer sports program.

I have attached the results of the full Review of Audits presented by the Department’s Internal Audit Workgroup for your information.

Attachment II

Regents Subcommittee on Audits

February 2009

Review of Audits Presented

Department’s Internal Audit Workgroup

Newly Presented Audits

We reviewed 32 audits that are being presented to the Subcommittee this month. All 32 audits were of school districts and were issued by the Office of the State Comptroller (OSC). The findings were in the areas of procurement, cash, information technology, financial reporting, payroll, claims processing, conflict of interest, segregation of duties, and others, such as, control environment, use of reserves, sale of district property, student transportation services, and summer sports program.

The Department has issued letters to the auditees, reminding them of the requirement to submit corrective action plans to the Department and OSC within 90 days of their receipt of the audit report.

The Department’s Internal Audit Workgroup identified 13 school district audits for further review and follow-up.

Amherst, Bellmore-Merrick, Cuba-Rushford, Port Byron, Westhampton Beach and Wilson – Findings on Employee Benefits Accrued Liability Reserve (EBALR)

Summary of Audit

The findings generally indicate that the districts overfunded the EBALR account, that is the balance in the Reserve account exceeds the amount of computed liability. In some of the districts, the creation of this Reserve account did not have formal board approval, interest earned was not credited in the same account, and the fund was used inappropriately, for example, to pay for retirees’ health insurance.

Follow-up Action

Upon the districts’ submission of their corrective action plan for their audit, Office of Audit Services (OAS) staff will review to ensure all findings have been addressed. OAS will also monitor any legislative changes affecting this Reserve account and will keep the Subcommittee informed.

Albion Central School District

Summary of Audit

The District has routinely overestimated appropriations and underestimated revenues resulting in operating surpluses averaging $1 million in each year over the last five fiscal years. District officials used a portion of the operating surpluses from the past several years to fund reserves and keep the fund balance within statutory limit. The unreserved, unappropriated fund balance at June 30, 2007 was over $3 million, or 9.7 percent of the 2007-08 budget of $30.9 million which was greater than the 3 percent limit allowed by law. In August 2007, the excess fund balance was used to increase some reserve accounts; reducing the fund balance to under $1 million, and within the 3 percent limit. The District also used a significant amount of its operating surpluses to fund an Other Post Employee Benefit Accrued Liability Reserve which was established without board action in the 1999-00 fiscal year. Further, there is no statutory authority to establish such a reserve. The District could not support the balance of $163,000 in the Tax Certiorari Reserve.

Follow-up Action

Upon the District’s submission of the corrective action plan for this audit, OAS staff will review to ensure all findings have been addressed. OAS will also analyze the district’s fund balance and reserves for the last seven years.

Cuba-Rushford Central School District

Summary of Audit

The unreserved, unappropriated general fund balance at June 30, 2007, was over $2.6 million, or almost 13 percent of the $20.1 million budgeted for 2007-08 (nearly $2 million more than allowed by law).

Also see EBALR above (first bullet).

Follow-up Action

Floral Park-Bellerose Union Free School District

Summary of Audit

The former superintendent received salary increases totaling $40,887 that were not properly authorized, and annual excess payments totaling $123,164 for unused vacation days, inaccurate conversion for unused sick days, and improper retirement payment. Further, the 2006-07 fiscal year budget, prepared by the superintendent and approved by the board, only appropriated $1,660,000 of fund balance to reduce tax levy. The remaining unreserved fund balance of $3,667,348 represented approximately 16 percent of the $23.5 million budget for 2006-07. The District’s unappropriated fund balance for the four fiscal years ended June 30, 2004 through 2007, exceeded the statutory limitation in each year.

Follow-up Action

Niagara Falls City School District

Summary of Audit

Enhanced benefits were provided contrary to contract stipulations, or the basis for the benefits could not be adequately determined by review of the contract provisions. These actions will result in unnecessary and inappropriate payments, which are projected to total $2 million for the 2007-08 fiscal year. Additionally, 23 retirees also inappropriately received incentive payments totaling $21,250, 5 retirees received health insurance they were not entitled to, costing $44,339, and 7 administrators inappropriately received certain insurance coverage costing the District $14,440.

Further, 14 retirees or spouses continued to be insured by the District, even though they were deceased, costing the District approximately $114,000. District records also did not always match vendor records resulting in billing errors. The District was mistakenly billed $5,314 for two individuals who were not receiving health coverage.

Follow-up Action

OAS reached out to the District Superintendent and he is aware of the findings. He is assisting the district in searching for a new business official. Staff from the Office of Education - P-16 will follow up with the District Superintendent and identify appropriate follow-up actions.

Rome City School District

Summary of Audit

The director of facilities and the school grounds supervisor were able to initiate purchases through requisitions, receive the items, submit the invoices for payment, and convert the items to their personal use, or the personal use of others. Authorities confiscated eight assets (totaling $9,500) after finding the items in the private possession of the school grounds supervisor or other individuals.

On several occasions, the director of facilities and the school grounds supervisor also circumvented internal controls by asking vendors to submit false invoices (totaling $3,672).

The District’s claim audit function was also inadequate. The claims auditor was not provided with copies of District policies, and he did not direct his policy-related questions to the board.

Follow-up Action

Upon the District’s submission of the corrective action plan for this audit, OAS staff will review to ensure all findings have been addressed.

Sherman Central School District

Summary of Audit

The District had no appropriate policies or procedures to guide the payroll process. It did not monitor payroll expenditures to ensure compliance with authorized contracts and salary agreements. As a result, the District paid almost $31,000 in unauthorized salary and benefits. It made inappropriate payments to certain employees (totaling $ 15,555) for days they did not report to work. The District also improperly paid $14,940 in separation and insurance payments to the former superintendent, and paid the payroll clerk $479 for accrued vacation leave, to which she was not entitled.

As of June 30, 2007, the unreserved, unappropriated fund balance totaled $795,197 which was more than 10 percent of the following year’s appropriations. The District also reported $405,952 in two of its reserves but related benefit payments were made from the general fund.

Follow-up Action

Valley Central School District

Summary of Audit

District officials established the Property Loss and Liability Reserve (PL&L) and funded it with excess fund balance, totaling over $2 million, at the end of the 2005-06 fiscal year to cover unanticipated shortfalls in State revenue. This is not a proper use of this Reserve. The $2 million should have been used to pay off debt or to pay for non-recurring expenses, as well as to fund 2006-07 expenditures.

Follow-up Action

Upon the District’s submission of the corrective action plan for this audit, OAS staff will review to ensure all findings have been addressed.

Walton Central School District

Summary of Audit

The board did not ensure that its members publicly disclosed the nature and extent of any direct, or indirect financial interest in accordance with the board’s adopted ethics policy. The board’s vice president had interests in contracts between the District and a corporation co-owned and operated by her spouse that she did not publicly disclose, and that the board failed to identify. Further, the District did not seek competition and maintain proper supporting documentation for $7,700 purchased from the same corporation.

Follow-up Action

Upon the District’s submission of the corrective action plan for this audit, OAS staff will review to ensure all findings have been addressed.

Wilson Central School District

Summary of Audit

During fiscal years 2004-05 through 2007-08, the District consistently overestimated expenditures and underestimated revenues, and made budget transfers far in excess of budgeted amounts disclosed to voters. As a result, the District had operating surpluses totaling $7.6 million during those fiscal years. The District is also holding $3.2 million in the debt service fund, most of which has no identifiable purpose. Approximately $2 million in taxes were unnecessarily levied in the 2007-08 fiscal year alone. The District will have an operating surplus of about $2 million for the 2007-08 fiscal year.

Also see EBALR above (first bullet).

Follow-up Action

Upon the District’s submission of the corrective action plan for this audit, OAS staff will review to ensure all findings have been addressed.