union-endicott central school districtfollowing is a report of our audit of the union-endicott...

Division of LocaL Government & schooL accountabiLity

o f f i c e o f t h e n e w y o r k s t a t e c o m p t r o L L e r

report of ExaminationPeriod Covered:

July 1, 2014 – January 6, 2016

2016M-100

Union-Endicott Central School District

Financial Management

thomas p. Dinapoli

Page

AUTHORITY LETTER 1

INTRODUCTION 2 Background 2 Objective 2 Scope and Methodology 2 CommentsofDistrictOfficialsandCorrectiveAction 2

FINANCIAL MANAGEMENT 4 Recommendations 8

APPENDIX A ResponseFromDistrictOfficials 10APPENDIX B OSC Comments on the District’s Response 13APPENDIX C AuditMethodologyandStandards 14APPENDIX D HowtoObtainAdditionalCopiesoftheReport 15APPENDIX E LocalRegionalOfficeListing 16

Table of Contents

11Division of LocaL Government anD schooL accountabiLity

State of New YorkOffice of the State Comptroller

Division of Local Governmentand School Accountability July2016

DearSchoolDistrictOfficials:

AtoppriorityoftheOfficeoftheStateComptrolleristohelpschooldistrictofficialsmanagetheirdistrictsefficientlyandeffectivelyand,bysodoing,provideaccountabilityfor taxdollarsspent tosupportdistrictoperations.TheComptrolleroverseesthefiscalaffairsofdistrictsstatewide,aswellasdistricts’compliancewithrelevantstatutesandobservanceofgoodbusinesspractices.Thisfiscaloversight is accomplished, in part, throughour audits,which identify opportunities for improvingdistrictoperationsandBoardofEducationgovernance.Auditsalsocanidentifystrategiestoreducedistrict costs and to strengthen controls intended to safeguard district assets.

Followingisareportofourauditof theUnion-EndicottCentralSchoolDistrict,entitledFinancialManagement.ThisauditwasconductedpursuanttoArticleV,Section1oftheStateConstitutionandtheStateComptroller’sauthorityassetforthinArticle3oftheNewYorkStateGeneralMunicipalLaw.

This audit’s results and recommendations are resources for district officials to use in effectivelymanagingoperationsandinmeetingtheexpectationsoftheirconstituents.Ifyouhavequestionsaboutthisreport,pleasefeelfreetocontactthelocalregionalofficeforyourcounty,aslistedattheendofthis report.

Respectfullysubmitted,

Office of the State ComptrollerDivision of Local Governmentand School Accountability

State of New YorkOffice of the State Comptroller

2 Office Of the New YOrk State cOmptrOller2

Background

Introduction

Objective

Scope andMethodology

Comments ofDistrict Officials andCorrective Action

The Union-Endicott Central School District (District) is located in the Towns of Union in Broome County and Owego in Tioga County. The District is governed by the Board of Education (Board) which is composed of seven elected members. The Board is responsible for the generalmanagement and control of theDistrict’s financialand educational affairs. The Superintendent of Schools is the chief executiveofficerandisresponsible,alongwithotheradministrativestaff,fortheday-to-daymanagementoftheDistrictundertheBoard’sdirection.TheAssistantSuperintendentforBusinessplaysakeyrolein the budget development process and the daily administration of the BusinessOffice.

TheDistrictoperatessixschoolswithapproximately3,900studentsand 700 employees. Its budgeted appropriations for the 2015-16fiscalyeartotaledapproximately$77.2million,whichwerefundedprimarilywithStateaid,realpropertytaxesandgrants.

The objective of our audit was to evaluate the District’s financialmanagement practices. Our audit addressed the following related question:

• DidtheBoardandDistrictofficialsensurethatthebalancesmaintained in the District’s unrestricted and restricted funds were reasonable?

Weexamined theDistrict’sfinancial records for theperiod July1,2014throughJanuary6,2016.WeextendedourscopebacktoJuly1,2010toanalyzetheDistrict’sfinancialcondition,budgetingtrends,fundbalanceandrestrictedfundexpendituresandforwardtoJune30,2016toprojectresultsofoperations.

We conducted our audit in accordance with generally accepted governmentauditingstandards(GAGAS).Moreinformationonsuchstandards and the methodology used in performing this audit are includedinAppendixCofthisreport.

The results of our audit and recommendations have been discussed withDistrictofficials,andtheircomments,whichappearinAppendixA, have been considered in preparing this report.District officialsdisagreed with some of our findings. Appendix B contains ourcomments on the issues raised in the District’s response.


The Board has the responsibility to initiate corrective action. Pursuant toSection 35 ofGeneralMunicipalLaw,Section 2116-a(3)(c)ofNewYorkStateEducationLawandSection170.12oftheRegulationsoftheCommissionerofEducation,awrittencorrectiveactionplan(CAP)thataddressesthefindingsandrecommendationsinthisreportmustbepreparedandprovidedtoourofficewithin90days,withacopyforwardedtotheCommissionerofEducation.Tothe extent practicable, implementation of the CAPmust begin bytheendof thenextfiscalyear.Formore informationonpreparingandfilingyourCAP,pleaserefertoourbrochure,Responding to an OSC Audit Report, which you received with the draft audit report. TheBoardshouldmaketheCAPavailableforpublicreviewintheDistrictClerk’soffice.


Financial Management

Fund balance is the accumulated balance of resources remaining frompriorfiscalyears.Adistrictmayretainaportionoffundbalance,referredtoasunrestrictedfundbalance,withinthelimitsestablishedbyNewYorkStateRealPropertyTaxLaw(RPTL).1 Districts may also establish reserves to restrict a portion of fund balance for a specificpurpose,incompliancewithstatutorydirectives.However,reserve balancesmust be reasonable.Therefore, it is essential thatDistrictofficialsmonitorandcontrolthebudgettoensuretheamountof fund balance retained is reasonable. This includes developing structurallybalancedbudgetstobalancerecurringexpenditureneedswith recurring revenue sources while providing desired services on a continuing basis and responsibly managing fund balance.

Overthefive-yearperiodendingJune30,2015,theBoardmaintainedunrestricted fundbalancewithin the4percent statutorymaximum.However, theBoard appropriatedmore fund balance than needed,resulting in an estimated net budget variance of $20.6 million2

from2011-12through2015-16.Aftertheunusedappropriatedfundbalancesareaddedback, theunrestrictedfundbalanceexceeds thestatutory limit, rangingfrom6 to7.4percentof theensuingyear’sappropriations for the period. Furthermore, although four of theDistrict’ssix reserve fundshadreasonablebalances, the retirementcontributionreserveandtheemployeebenefitaccruedliabilityreservehadsignificantbalancesinexcessoftheirrespectiveliabilities.Asaresultofthesepractices,Districtofficialsleviedrealpropertytaxesthat were higher than necessary.

Unrestricted Fund Balance – The District reported general fund unrestricted fund balance that was reasonable and within the 4 percent statutorylimitforeachofthepastfiveyears,asFigure1shows.

1 RPTLrequiresthatunrestrictedfundbalancenotexceed4percentoftheensuingyear’s budgeted appropriations.

2 Following the adoption of the 2015-16 budget, District officials approved atransfer of $3.6million from the capital reserve to the capital projects fund.Becausethisamountwasnotpartoftheadoptedbudget,wedidnotincludethistransfer in our projection of actual results.


3.1%3.7%

2.8%

3.8% 4.0%

$0

$1,000,000

$2,000,000

$3,000,000

$4,000,000

2010-11 2011-12 2012-13 2013-14 2014-15

Figure 1: Unrestricted Fund Balance (Reported)

Unrestricted Fund Balance As%ofEnsuingYear'sAppropriations

Figure 1: Unrestricted Fund Balance (Reported)

However,Districtofficials toldus that,due to receivingadditionalunanticipated State aid revenues in 2013-14 ($3.1 million) and2014-15($2.4million),appropriatedfundbalancewasnotusedasanticipated.Therefore,theunrestrictedfundbalancewouldhavebeengreater. Figure 2 shows our recalculation of the District’s unrestricted fund balance after the unused appropriated fund balance is added back.

Figure 2: Unrestricted Fund Balance (Recalculated)2010-11 2011-12 2012-13 2013-14 2014-15

Total Unrestricted Fund Balance at Year- End $2,121,172 $2,611,639 $2,047,211 $2,851,093 $3,078,614

Add: Appropriated Fund Balance Not Used to Fund Ensuing Year’s Budget $3,000,000 $2,400,000 $2,400,000 $2,400,000 $1,975,000a

Total Recalculated Unrestricted Funds $5,121,172 $5,011,639 $4,447,211 $5,251,093 $5,053,614a

Ensuing Year’s Budget $69,383,482 $71,406,764 $74,018,097 $75,904,843 $77,230,798

Recalculated Unrestricted Funds as Percentage of Ensuing Year’s Budget 7.4% 7.0% 6.0% 6.9% 6.5%a

a The 2014-15 unused portion of ensuing year’s (2015-16) appropriated fund balance and the resulting recalculated unrestricted fund balance was

estimated based on the previous five-year average of unused appropriated fund balance as a percentage of budgeted appropriated fund balance.

While revenues have been sufficient to support expenditures, andbudget estimates for general fund revenues and expenditureswerewithinafewpercentagepointsfromactualamounts,3 revenues have generally increased4 at a faster rate than expenditures (Figure 3),whichcouldresultinincreasinglyexcessivefundbalance.

3 From 2010-11 through 2014-15, the average variance between budgetedrevenuesandactualrevenueswas2.5percentandtheaveragevariancebetweenappropriationsandexpenditureswas4.3percent.

4 Thisdoesnotincludethe$3.6milliontransfertothecapitalprojectsfundin2015-16becauseitwasnotpartoftheadoptedbudgetandisaone-timeexpenditurefrom a reserve.


$60.0

$62.0

$64.0

$66.0

$68.0

$70.0

$72.0

$74.0

$76.0

$78.0

2010-11 2011-12 2012-13 2013-14 2014-15 2015-16(Estimated)

Mill

ions

Revenues Expenditures

Figure 3: General Fund Revenues and Expenditures

The additional revenues, combined with overfunded reserves forretirementcontributionandemployeebenefitaccruedliability,have,ineffect,increasedtheamountofunrestrictedfundsthattheDistrictcarries from year to year.

Restricted Funds –Asof June30, 2015, fundbalances for the sixreserves totaled $13.9 million, an increase of $7.9 million sinceJune 30, 2011.We analyzed these reserves for reasonableness andadherence to statutory requirements and found the funding of thereserves for capital, unemployment insurance, tax certiorari, anddebtservicetobereasonable.However,theretirementcontributionreserveandemployeebenefitaccruedliabilityreserve,withbalancestotaling$6.2millionasofJune30,2015,wereoverfundedinrelationtotheamountsnecessaryfortheirstatedpurposes.Combined,thesetwo reserves account for 64 percent of the District’s reserve total(excludingthecapitalreserve5)attheendofthe2014-15fiscalyear.Figure 4 shows the relative amounts of reserve balances over the past fiveyears.

5 Thecapitalreserveincreasedby$4millionfrom2010-11through2014-15,butDistrictofficialsplantousethisreserveforacapitalprojectwithanestimatedcostof$14.2million.Subsequenttobudgetapproval,theBoardpassedaresolutiontotransfer$3millionfromunrestrictedfundstothecapitalreserve.


$0.0

$2.0

$4.0

$6.0

$8.0

$10.0

$12.0

2010-11 2011-12 2012-13 2013-14 2014-15

Mill

ions

Retirement Contribution Reserve OtherReserves(ExcludingCapitalReserve)EmployeeBenefitAccruedLiabilityReserve

$5,777,121$6,429,616

$8,091,181

$9,677,652 $9,651,565

Figure 4: Reserve Balances

• Retirement Contribution Reserve – This reserve is used to pay theDistrict’s retirementcontribution to theNewYorkStateandLocalRetirementSystem(NYSLRS).TheDistrict’s2014-15totalNYSLRSexpenditurewasapproximately$979,000,whilethereservebalanceasofJune30,2015was$5.1million–more thanfive timeshigher.Over thepastfiveyears, theDistrict used this reserve to pay $872,000 of theDistrict’s$4.7 million in expenditures for its employees’ retirementcontribution and paid the difference from operating funds. The2015-16adoptedbudgetplans for theuseof$262,575from this reserve. Based on the District’s historical use of this reserveaswellasitsbudgetedexpenditureinthecurrentyear,this reserve is overfunded.

• EmployeeBenefitAccruedLiabilityReserve–Thisreservefund may be used only for the payment of accrued but unused sick, vacation and certain other accrued but unused leavetime earned by and payable to employees when they leave District employment. This reserve fund may not be used for theDistrict'sshareofthecostofhealthinsuranceforretirees.BasedonDistrictofficials'explanationofthepost-retirementhealthinsurancebenefit,thereisnopaymentforthevalueofsick leave accruals due upon retirement or even a mechanism


to determine the monetary value of accumulated sick leave thatwould be due andpayable upon retirement.Therefore,District officials did not consider the actual number ofaccumulated,unusedsickleavedaystocalculatetheliabilityagainst this reserve.Rather, they calculated it basedon theminimumpercentageoftheDistrict'sshareofpost-retirementhealthinsurancecosts.Therefore,sincetheDistrictdoesnotcurrently intend to use this reserve for the payment of accrued andunusedleave,thisreserveisoverfundedbythefullamountof$1.1million.Districtofficialstoldusthattheirgoalistohave the retirement contribution reserve balance funded with fiveyears’worthofexpenditures,andthattheywereunawarethattheemployeebenefitaccruedliabilityreservecouldnotbeused to pay for the District’s share of retiree health insurance costs.

TaxLevy–Regardlessof the largeandgrowing fundbalance, theDistrict’s adopted budgets each year, since at least 2011-12, haveincludedanincreasetotherealpropertytaxlevy(Figure5).

Figure 5: Real Property Tax Levy 2011-12 2012-13 2013-14 2014-15 2015-16

Adopted Real Property Tax Levy $36,417,993 $37,399,571 $38,161,196 $39,110,273 $39,618,507

Dollar Increase from Prior Year $1,339,980 $981,578 $761,625 $949,077 $508,234

Percentage Increase from Prior Year 3.8% 2.7% 2.0% 2.5% 1.3%

Although the District’s real property tax levy increase remainedwithinthepropertytaxcap6sinceitsinceptioninthe2012-13fiscalyear, the District’s aggregate budgetary surplus of $20.6 millionduringthelastfivefiscalyearsisoverfourtimesthetotaltaxlevyincreaseof$4.5millionduringthesameperiod.

TheBoardandDistrictofficialsshould:

1. Discontinue the practice of adopting budgets with the appropriation of fund balance that will not be used.

6 In2011,theNewYorkStateLegislatureenactedalawestablishingapropertytaxlevylimit,generallyreferredtoasthepropertytaxcap.Underthislegislation,thepropertytaxleviedannuallygenerallycannotincreasemorethan2percentortherateofinflation,whicheverislower,withsomeexceptions.Schooldistrictsmayoverridethetaxlevylimitbypresentingtothevotersabudgetthatrequiresataxlevythatexceedsthestatutorylimit.However,thebudgetmustbeapprovedby60percentofthevotescast.

Recommendations


2. Review all reserve balances and transfer excess funds tounrestricted fund balance, where allowed by law, or otherreserves established and maintained in compliance with statutory directives.

3. Reducetheamountofunrestrictedfundbalance,asappropriate,and use the excess funds in amanner that benefitsDistrictresidents.Suchusescouldinclude,butarenotlimitedto:

• Usingsurplusfundsasafinancingsource;

• Fundingone-timeexpenditures;

• Fundingneededreserves;and

• ReducingDistrictpropertytaxes.


APPENDIX A

RESPONSE FROM DISTRICT OFFICIALS

TheDistrictofficials’responsetothisauditcanbefoundonthefollowingpages.


SeeNote1

SeeNote2Page 13


SeeNote3Page 13


Note1

Ifbudgetsweremorerealisticandappropriatedfundbalancehadbeenusedasafundingsource,thetaximpactwouldhavebeenmitigated.However,whenappropriatedfundbalanceisnotused,budgetsare misleading.

Note2

During the period June 30, 2011 through June 30, 2015, unrestricted fund balance grewbymorethan$950,000andrestrictedfunds(excludingcapitalreserve)wereincreasedbyalmost$3.9million.DistrictofficialstoldusthissignificantaccumulationwastheresultofunanticipatedStateaid.

Note3

SubsequenttoourexitconferencewithDistrictofficials,wespokewiththeDistrict’sexternalauditorwho told us that she informally discusses with District officials which reserve balances can beincreasedwithexcessfundstooffsetfuturebudgets.However,suchdiscussionswerenotincludedintheexternalauditor’sofficialreportorrelatedletterstotheDistrict.Furthermore,reservesshouldbeusedtoprovideneededfinancialflexibilityandnottostorefuturesurplusmoneys.

APPENDIX B

OSC COMMENTS ON THE DISTRICT’S RESPONSE


APPENDIX C

AUDIT METHODOLOGY AND STANDARDS

Toachieveourauditobjectiveandobtainvalidevidence,weperformedthefollowingprocedures:

• We interviewed District officials and reviewed Board meeting minutes, resolutions andbudgeting policies and procedures to gain an understanding of the District’s budget development and monitoring processes.

• WereviewedtheresultsofoperationsandanalyzedchangesinfundbalanceforthegeneralfundfortheperiodJuly1,2010throughJune30,2015.

• WecomparedadoptedbudgetsandactualoperatingresultsfortheperiodJuly1,2010throughJune30,2015todetermineifthebudgetassumptionswerereasonable,andweinvestigatedreasons for significant variances. We also reviewed the adopted budget for 2015-16 andestimated the results of operations by applying the average variance between budget and actual resultsovertheprecedingfiveyears.Lastly,wealsoreviewedtheDistrict’sproposedstrategicplan for reasonableness.

• We reviewed theDistrict’s reserves and related expenditures to determine if reserveswereproperlyandlegallyestablished,fundedandusedandiftheirbalanceswerereasonable.

• WereviewedtheDistrict’srealpropertytaxleviesfor2010-11through2015-16todetermineifthetaxlevieshadbeenincreasing.

WeconductedthisperformanceauditinaccordancewithGAGAS.Thosestandardsrequirethatweplanandperform theaudit toobtainsufficient,appropriateevidence toprovidea reasonablebasisforourfindingsandconclusionsbasedonourauditobjective.Webelievethattheevidenceobtainedprovidesareasonablebasisforourfindingsandconclusionsbasedonourauditobjective.


APPENDIX D

HOW TO OBTAIN ADDITIONAL COPIES OF THE REPORT

OfficeoftheStateComptrollerPublicInformationOffice110StateStreet,15thFloorAlbany,NewYork12236(518)474-4015http://www.osc.state.ny.us/localgov/

Toobtaincopiesofthisreport,writeorvisitourwebpage:


APPENDIX EOFFICE OF THE STATE COMPTROLLER

DIVISION OF LOCAL GOVERNMENTAND SCHOOL ACCOUNTABILITYAndrewA.SanFilippo,ExecutiveDeputyComptroller

GabrielF.Deyo,DeputyComptrollerTraceyHitchenBoyd,AssistantComptroller

LOCAL REGIONAL OFFICE LISTING

BINGHAMTON REGIONAL OFFICEH.ToddEames,ChiefExaminerOfficeoftheStateComptrollerStateOfficeBuilding,Suite170244 Hawley StreetBinghamton,NewYork13901-4417(607)721-8306Fax(607)721-8313Email:[email protected]

Serving:Broome,Chenango,Cortland,Delaware,Otsego,Schoharie,Sullivan,Tioga,TompkinsCounties

BUFFALO REGIONAL OFFICEJeffreyD.Mazula,ChiefExaminerOfficeoftheStateComptroller295MainStreet,Suite1032Buffalo,NewYork14203-2510(716)847-3647Fax(716)847-3643Email:[email protected]

Serving:Allegany,Cattaraugus,Chautauqua,Erie,Genesee,Niagara,Orleans,WyomingCounties

GLENS FALLS REGIONAL OFFICEJeffreyP.Leonard,ChiefExaminerOfficeoftheStateComptrollerOneBroadStreetPlazaGlensFalls,NewYork12801-4396(518)793-0057Fax(518)793-5797Email:[email protected]

Serving:Albany,Clinton,Essex,Franklin,Fulton,Hamilton,Montgomery,Rensselaer,Saratoga,Schenectady,Warren,WashingtonCounties

HAUPPAUGE REGIONAL OFFICEIraMcCracken,ChiefExaminerOfficeoftheStateComptrollerNYSOfficeBuilding,Room3A10250VeteransMemorialHighwayHauppauge,NewYork11788-5533(631)952-6534Fax(631)952-6530Email:[email protected]

Serving:NassauandSuffolkCounties

NEWBURGH REGIONAL OFFICETennehBlamah,ChiefExaminerOfficeoftheStateComptroller33AirportCenterDrive,Suite103NewWindsor,NewYork12553-4725(845)567-0858Fax(845)567-0080Email:[email protected]

Serving:Columbia,Dutchess,Greene,Orange,Putnam,Rockland,Ulster,WestchesterCounties

ROCHESTER REGIONAL OFFICEEdwardV.Grant,Jr.,ChiefExaminerOfficeoftheStateComptrollerThe Powers Building16WestMainStreet,Suite522Rochester,NewYork14614-1608(585)454-2460Fax(585)454-3545Email:[email protected]

Serving:Cayuga,Chemung,Livingston,Monroe,Ontario,Schuyler,Seneca,Steuben,Wayne,YatesCounties

SYRACUSE REGIONAL OFFICERebeccaWilcox,ChiefExaminerOfficeoftheStateComptrollerStateOfficeBuilding,Room409333 E. Washington StreetSyracuse,NewYork13202-1428(315)428-4192Fax(315)426-2119Email:[email protected]

Serving:Herkimer,Jefferson,Lewis,Madison,Oneida,Onondaga,Oswego,St.LawrenceCounties

STATEWIDE AUDITSAnnC.Singer,ChiefExaminerStateOfficeBuilding,Suite170244 Hawley Street Binghamton,NewYork13901-4417(607)721-8306Fax(607)721-8313

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