WEST VALLEY — New York State Comptroller Thomas DiNapoli released his office’s official audits of several local school districts this week, including West Valley Central School. According to the report, “district officials have levied unnecessarily high taxes and withheld significant funds from productive use. For example, district officials overestimated expenditures over the past four years by more than $3.8 million, resulting in operating surpluses totaling $1.3 million.
“My office’s audits of school districts, charter schools and [Board of Cooperative Educational Services] help schools improve their financial management practices,” the report continued. “These audits are tools for schools to make sure proper policies and procedures are in place to protect taxpayer dollars and provide students with the best possible education.”
West Valley operates one school with approximately 300 students and 80 employees. The district’s expenditures for the 2012-13 fiscal year were approximately $7.6 million, which were funded primarily with real property taxes and New York state aid. Superintendent Eric Lawton and Business Official Anne O’Brien began working for the district in July and August of 2012, respectively.
According to DiNapoli’s report, the inquiry attempted to answer several questions, among them: Does the board properly manage district finances by preparing accurate, realistic budgets and properly establish, reasonably fund and properly use reserve funds? The comptroller evaluated the board’s management of the district’s financial operations for July 1, 2009-June 4, 2013.
The report explained that district officials must ensure that budgets are prepared, adopted and modified in a prudent manner, accurately depicting the district’s financial activity while also using available resources to ensure that the tax burden is not greater than necessary. It is essential that officials develop reasonable budgets and manage unexpended surplus funds responsibly and in accordance with statute.
Prudent fiscal management also includes maintaining sufficient balances in reserves to address long-term obligations or planned future expenditures. In doing so, district officials should adopt a policy governing the use of reserve funds and ensure that residents are fully informed of all reserve fund activity.
The report said that WVCS district officials consistently overestimated expenditures by more than $3.8 million, which resulted in operating surpluses totaling $1.3 million. Therefore, DiNapoli posited that the majority of the $2.4 million in board-appropriated unexpended surplus funds was not needed to fund district operations.
The amount of unexpended surplus funds that can be legally retained is limited; therefore, each year since 2009, district officials transferred money in excess of this limit to various district reserve funds. As a result, reserves totaled more than $2.1 million as of June 30, 2013. When questioned, district officials could not demonstrate a planned need for more than $1.7 million of the reserves.
Officials also did not appropriately use the debt reserve fund, which had a balance of more than $380,000 as of June 30, 2013. Instead, WVCS officials levied real property taxes and paid debt service with general fund appropriations.
When adopting the budget in May, district officials must estimate the unexpended surplus funds that will be available at the close of the fiscal year on June 30. Districts may also establish reserves to restrict a portion of unexpended surplus funds for a specific purpose, in compliance with New York state statutory rules. The comptroller’s audit found that district officials consistently overestimated certain expenditure groups, including employee benefits by $1.1 million; contractual expenditures by $957,129, instructional salaries by $511,868, Board Of Cooperative Educational Services costs by $609,113, supplies and materials by $275,107 and non-instructional salaries by $182,669.
District officials appropriated unexpended surplus funds to reduce the real property tax levy each year, which should have resulted in corresponding planned operating deficits. However, because of those overestimated expenditures, the district instead experienced operating surpluses, with actual revenues exceeding expenditures by $1.28 million. District officials appropriated $619,500 of unexpended surplus, in each of the last three fiscal years. The practice of consistently appropriating unexpended surplus funds not needed to finance operations is a reservation of surplus funds that is neither regulated by statute nor subject to the statutory limit for unexpended surplus funds. Although revenues exceeded expenditures, during this same period, the board still increased the real property tax levy each year from $2.8 million in 2009-10 to $3.2 million in 2012-13, a 12 percent increase. In addition, the district’s adopted 2013-14 budget includes a real property tax increase of 2 percent more than the amount levied in 2012-13.
As a result, the amount of unexpended surplus funds for the 2009-10, 2010-11 and 2011-12 fiscal years would have exceeded the legally allowed limit, if district officials did not transfer the surplus funds to various reserves, at the end of each year. For 2012-13, the district’s unexpended surplus funds were more than double the legally allowed limit, or 9 percent of the ensuing years’ appropriations.
As of June 30, the district’s six reserves totaled $2.1 million, an increase of 15 percent since June 30, 2010. This increase resulted because the board transferred surplus funds to reserves, at the end of each fiscal year except 2012-13. District officials had used this strategy to lower unexpended surplus funds below the statutory limit.
During its analysis, the comptroller’s audit found that the reserve funds were in excess of the amounts needed for authorized purposes and not supported by a plan or other documentation, validating the amounts retained. While establishing resolutions were in place for the retirement contribution, tax certiorari and workers’ compensation reserves, there were no documented rationales for establishing them, the objective for each, the optimal or targeted funding levels and the condition under which the funds’ assets would be used or replenished. There were also no board resolutions establishing the unemployment insurance and employee benefit accrued liability reserves.
The Workers’ Compensation Reserve – General Municipal Law authorizes boards to establish this reserve to pay for workers’ compensation costs, related medical expenses and self-insurance administrative costs. As of June 30, 2013, the reserve held a balance of $295,509, although the district incurred average workers’ compensation expenditures of approximately $34,000. The district paid these costs from general fund appropriations through the annual tax levy, rather than using the funds reserved.
The Unemployment Insurance Reserve authorizes boards to create this reserve to reimburse the State Unemployment Insurance Fund for payments made to claimant. As of June 30, 2013, the reserve had a reported balance of $153,608, while the district incurred average unemployment insurance costs of approximately $14,000, since 2009-10. District officials did not use reserve funds to pay these expenditures. Based on this average cost level, the district’s current reserve balance would cover unemployment insurance claims for approximately 11 years.
Education law also authorizes districts to establish a reserve fund for paying judgments and claims for tax certiorari proceedings. As of June 30, 2013, the tax certiorari reserve had a balance of $130,514. According to O’Brien, there were no tax certiorari proceedings against the district in the last four or five years and she did not anticipate any proceedings or claims over the next few years. DiNapoli’s report said that the comptroller questioned why any reserve was therefore necessary.
Even though the board-adopted budget included a transfer from the debt service fund of $65,000 annually, district officials did not make any transfers or pay debt service payments from this reserve. Rather, the budget included the entire amount of annual debt service costs in general fund appropriations and levied taxes to fund all but the $65,000.
General Municipal Law requires that the Employee Benefit Accrued Liability Reserve be used only for the cash payment of accrued and unused sick, vacation and certain other accrued but unused leave time earned by employees, as well as expenses related to the administration of the reserve. Although this reserve had a balance of approximately $723,700 as of June 30, 2013, district officials provided supporting documentation for only $505,000. However, this amount included approximately $502,800 for sick and vacation leave that was accrued by employees who were ineligible for payments or had not met the requirements to receive payments. By maintaining excessive and/or unnecessary reserves combined with ongoing budgeting practices that repeatedly generated operating surpluses, the board essentially retained excess funds.
As a result of all of these findings, DiNapoli concluded that the WVCS District’s real property taxes were unnecessarily high and financial transparency to the taxpayers was diminished.
The comptroller’s office had several recommendations for the district, including that the board should develop realistic estimates for expenditures and unexpended surplus funds when preparing the annual budget, include the planned funding and use of all reserves in their annually adopted budget plan to provide increased transparency for the district’s voters, develop and implement comprehensive policies for establishing and using reserve funds that include optimal or targeted funding levels and the conditions under which the funds will be used or replenished, adopt resolutions identifying specific amounts to be transferred into specific reserve funds, review all reserves at least annually to determine if the amounts reserved are necessary, determine whether the unemployment insurance and employee benefits accrued liability reserves are necessary and implement a plan for using the reserve fund surplus balances in a manner that benefits taxpayers.
In a letter responding to the audit, Lawton and WVCS Board of Education Michael Frascella referenced past fiscal difficulties, in which the district found itself in a “downward financial spiral” that resulted in deficit of $668,285 within five years. In order to rectify that, the district had to increase taxes by double digits, in several years. “If the same scenario occurred today ... it is unlikely the district would be able to pass a budget to recoup needed tax revenue,” the letter wrote. “Through the use of conservative budgeting practices, the district has chosen to strengthen its overall financial position in recent years by increasing its reserves.”
District officials also reported that it was recently awarded a credit rating of A+ by Standard & Poor’s, calling the grade “a reflection of conservative budgeting practices, with consistently positive financial performances and maintenance of strong reserve levels.”
The officials supported “maintaining total reserves at a sufficient level to maintain a strong credit rating.”
The letter also pointed to the West Valley Demonstration Project as hindering its ability to grow its tax base and said that
“every fiscal year is a separate accounting cycle and leads up to its own specific financial results, for a specific year. The district is and will continue to be cognizant of those areas of the budget that are inherently subject to change ... our philosophy is to leave enough flexibility in our budget to weather the perfect storm and to meet any financial demand which may arise.”
In response to the recommendations leveled by the audit, the district officials said they will work toward adjusting its budgeted expenditures and appropriated balance downward but “will be very conservative in its approach to doing so,” beginning with the 2014-15 budget. The district has also drafted a reserve plan it will be finalizing, this year, and will also pass resolutions identifying specific amounts to be transferred into reserve funds.
Finally, Lawton and Frascella commended the comptroller’s office for its professionalism, during the audit.
“In an era that is fraught with abuse and irresponsible behaviors, by both individuals in government and the private sector, the need to have checks and balances is critical,” they said. “The district asks you to keep in mind that not every situation in local government fits into the same equation. We are all unique, with varying history and uncertain futures.”