Depew Union Free School District - Financial Condition · Budget 4% 4% 4% The District appropriated an average of $2.4 million in unrestricted fund balance as a financingsource in

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, 2012 – April 26, 2016

2016M-229

Depew Union Free School DistrictFinancial Condition

thomas p. Dinapoli

Page

AUTHORITY LETTER 1

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

FINANCIAL CONDITION 4 Budgeting 4 Fund Balance 5 Recommendations 7

APPENDIX A ResponseFromDistrictOfficials 8APPENDIX B OSC Comment 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 November2016

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.

Following is a report of our audit of the Depew Union Free School District, entitled FinancialCondition.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 Depew Union Free School District (District) is located in the Towns of Cheektowaga and Lancaster in Erie County. The District is governed by a Board of Education (Board) that is composed of seven elected members. The Board is responsible for the general managementandcontrolof theDistrict’sfinancial andeducationalaffairs. The Superintendent of Schools (Superintendent) is the District’schiefexecutiveofficerandisresponsible,alongwithotheradministrativestaff,fortheDistrict’sday-to-daymanagementundertheBoard’sdirection.TheBusinessAdministratorisresponsibleformaintainingaccountingrecordsandpreparingfinancialreports.

TheDistrictoperatesthreeschoolswithapproximately1,800studentsand360 employees.TheDistrict’s budgeted appropriations for the2015-16fiscalyeartotaled$41million,whichwerefundedprimarilywithStateaid,realpropertytaxesandsalestax.

The objective of our audit was to review the District’s financialcondition.Ourauditaddressedthefollowingrelatedquestion:

• Did the Board adopt realistic budgets to ensure that the real property tax levy is not greater thannecessary to fundoperations?

WeexaminedtheDistrict’sfinancesfortheperiodJuly1,2012throughApril 26, 2016.OnOctober 4, 2016,District officials provideduswith the District’s audited financial statements for the fiscal yearthat ended June 30, 2016.As a result,we added updated 2015-16financialinformationinourreportandinformedDistrictofficialsofthesechanges.AlthoughDistrictofficialsweregivenanopportunitytorevisetheirresponseletter,whichwereceivedonSeptember26,2016,theychosenottosubmitarevisedresponseletter.

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 officialsdisagreedwithcertainaspectsofourfindingsandrecommendationsinourreport.AppendixBincludesourcommentonanissueraisedinthe 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,whichyou receivedwith thedraft audit report.TheBoardshouldmaketheCAPavailableforpublicreviewintheDistrictClerk’soffice.


Financial Condition

A school district’s financial condition is a factor in determiningits ability to fund educational services for students within the District.TheBoard,SuperintendentandBusinessAdministratorareresponsibleforaccurateandeffectivefinancialplanningfortheuseof District resources. They should prepare and adopt annual budgets that contain realistic estimates of revenues, appropriations and theuse of fund balance. Fund balance represents the cumulative residual resourcesfrompriorfiscalyearsthatcan,andinsomecasesmust,beused to lowerproperty taxesfor theensuingfiscalyear.NewYorkStateRealPropertyTaxLawlimitstheamountofunrestrictedfundbalancetonomorethan4percentofthesubsequentyear’sbudget.District officials should ensure that unrestricted fund balance doesnotexceedtheamountallowedbylaw.

TheBoardandDistrictofficialsoverestimatedappropriationsintheadoptedbudgetsandallowedunrestrictedfundbalancetoexceedthestatutorylimit.AsofJune30,2015,unrestrictedfundbalancetotaled$3.8millionandwas9percentof2015-16budgetedappropriations,which exceeded the limit by 5 percentage points. This trend isprojectedtocontinuethrough2016-17.

In preparing the budget, the Board and District officials shoulddevelopaccurateestimatesofrevenues(e.g.,Stateaid),appropriationsand the amount of fund balance thatmay be used to help financeappropriations.After taking these factors into account, the Boardshoulddetermine the tax levy that isnecessary to fundoperations.Accuratebudgetestimateshelpensurethatthepropertytaxlevyisnogreater than necessary.

We compared estimated revenues and appropriations with actual operating results for 2012-13 through 2015-16 and found that theDistrict overestimated appropriations bymore than $11million (8percent,Figure1).

Budgeting


Figure 1: Overestimated AppropriationsAppropriationsa Expenditures Difference Percentage

2012-13 $37,524,900 $34,889,300b $2,635,600 8%

2013-14 $38,991,800 $36,744,900 $2,246,900 6%

2014-15 $41,109,200 $37,952,700 $3,156,500 8%

2015-16 $41,589,700 $37,969,300 $3,620,400 10%

Totals $159,215,600 $147,556,200 $11,659,400 8%

a Includesprioryear’sencumbrancesandbudgetmodificationsb Excludes $2.4 million unbudgeted transfer to the capital projects fund from a capital reserve

Appropriations that were consistently overestimated from 2012-13 through 2014-15 included operations, such as school buildingoperationsandmaintenance($279,297,12.5percentbudgetvariance),teachingexpenditures1($538,359,24percent)andemployeebenefits2

($953,604, 20 percent).Actual revenueswere generally consistentwith budgeted estimates over the same period.

Because some of these costs are determined by contractual agreements,Districtofficialsshouldbeable toreasonablyestimatethese appropriations when they prepare the annual budget. Budgeting practices that continually overestimate expenditures result in taxleviesthatarehigherthannecessary.Inthe2016-17budget,theBoardand District officials increased appropriations for operations andmaintenanceandteachingexpenditures,butdecreasedappropriationsforemployeebenefits.

Aschooldistrictmayretainaportionoffundbalanceattheendofthefiscalyearforcashflowneedsandtoprovideacushionagainstunexpected expenditures. However, unrestricted fund balancecannot exceed the 4 percent limit.Any surplus fund balance overthispercentageshouldbeusedtoreducetheupcomingfiscalyear’staxlevy.Whenfundbalanceisappropriatedasafundingsource,theexpectation is that therewill be a planned operating deficit in theensuingfiscalyearequaltotheamountoffundbalanceappropriated.This allows a school district to return excess fund balance that isaccumulated in prior years back to the residents.

Due to the District’s practice of overestimating appropriations, itrealizedoperatingsurplusesfromthe2012-13through2014-15fiscalyears(Figure2).Asaresult,theDistrictdidnotusetheappropriatedfundbalanceitbudgetedtohelpfinanceoperations.

Fund Balance

1 Teaching expenditures include salaries, equipment, conferences, supplies andtextbookexpenditures.

2 Employeebenefitexpendituresincluderetirementcontributions,healthinsurance,SocialSecurity,unemploymentinsuranceandworkers’compensation.


Figure 2: Unrestricted Fund Balance at Fiscal Year-End2012-13 2013-14 2014-15

Beginning Fund Balance $15,531,800 $12,958,500 $11,701,000

Add: Operating Surplus $638,600 $551,200 $799,200

Add: Transfer from Debt Service Fund $0 $0 $981,500

Add: Prior Period Adjustments $0 $10,700 $4,600

Less: Use of Reserves ($3,211,900) ($1,819,400) ($1,132,300)

Ending Fund Balance $12,958,500 $11,701,000 $12,354,000

Less: Nonspendable Fund Balance $96,000 $93,400 $93,400

Less: Restricted Fund Balance (Reserves) $8,929,000 $7,713,200 $8,350,000

Less: Encumbrances $59,900 $18,600 $95,600

Less: Appropriated Fund Balance for the Ensuing Year $2,450,000 $2,375,000 $2,300,000

Unrestricted Fund Balance at Fiscal Year-End $1,423,600 $1,500,800 $1,515,000

Ensuing Year’s Budgeted Appropriations $38,961,200 $40,787,200 $41,225,100

Unrestricted Fund Balance as a Percentage of the Ensuing Year’s Budget

4% 4% 4%

TheDistrictappropriatedanaverageof$2.4millioninunrestrictedfundbalance as afinancing source in the annual budget for 2012-13through2014-15.Thisappropriationoffundbalancereducedthelevel of the District’s reported unrestricted fund balance at the end of each fiscal year.However, theDistrict did not need to use anyof theappropriated fundbalance tofinanceoperationsbecause theDistrict realized operating surpluses during the same period. When unusedappropriatedfundbalancewasaddedback,therecalculatedunrestricted fund balance exceeded the statutory limit by 5 to 6percentage points (Figure 3).

Figure 3: Unused Fund Balance2012-13 2013-14 2014-15

Unrestricted Fund Balance at Year-End $1,423,600 $1,500,800 $1,515,000

Add: Appropriated Fund Balance Not Used to Fund Ensuing Year’s Budget $2,450,000 $2,375,000 $2,300,000

Recalculated Unrestricted Fund Balance $3,873,600 $3,875,800 $3,815,000

Recalculated Unrestricted Fund Balance as a Percentage of Ensuing Year’s Budget 10% 10% 9%


While the District has realized operating surpluses and retained excessivefundbalance, italsoleviedrealpropertytaxesaveraging$16.5millionduringeachofthethreeyears.TheDistrictalsoendedthe 2015-16 fiscal year with an operating surplus. The District’spracticeofappropriatingfundbalancethatisnotneededtofinanceoperations is, in effect, a reservation of fund balance that is notprovided for by statute.

District officials used the operating surpluses to fund establishedreserves in the general fund. For example, from 2012-13 through2014-15, theDistrict chargedexpenditures totaling$1.5million totheretirementcontributionreserve,butduringthesametimeadded$1milliontothereservefromtheoperatingsurpluses.

The Board’s rationale for replenishing the reserves in this manner is unclear. While the Board adopted a resolution approving the use of thesurplus funds toreplenishreserves,amoreappropriatemethodthe Board could use to demonstrate its intent to fund or replenish reserves would be to include a provision to increase the reserves in theproposedbudgetpresentedtoresidentsforapproval.Inthisway,District residents would be aware of the Board’s intent to both fund andchargeexpenditurestoreservesduringtheupcomingyear.

TheBoardandDistrictofficialsshould:

1. Develop realistic estimates of appropriations and the use of fund balance in the annual budget.

2. Ensure that the amount of unrestricted fund balance is in compliance with the statutory limit and develop a plan to use excess funds in amanner thatbenefits residents.Suchusescouldinclude,butarenotlimitedto:

• Fundingone-timeexpenditures;

• Fundingneededreserves;and

• ReducingDistrictpropertytaxes.

Recommendations


APPENDIX A

RESPONSE FROM DISTRICT OFFICIALS

TheDistrictofficials’responsetothisauditcanbefoundonthefollowingpages.




SeeNote 1Page 13



APPENDIX B

OSC COMMENT ON THE DISTRICT’S RESPONSE

Note 1

Forfiscalyears2012-13through2014-15,theDistrictappropriatedanaverageof$2.4millionoffundbalanceforplannedoperatingdeficits,yetnoneofthefundswereusedbecauseitrealizedoperatingsurpluseseachyear.TheDistrict’spracticeofappropriatingfundbalancethatisnotneededtofinanceoperationsis,ineffect,areservationoffundbalancethatisnotprovidedforbystatute.Therecalculationof unrestricted fund balance is to illustrate the impact that this budgeting practice has on the District’s compliance with the statutory limit.


APPENDIX C

AUDIT METHODOLOGY AND STANDARDS

Toachieveourauditobjectiveandobtainvalidevidence,weperformedthefollowingprocedures:

• WeinterviewedDistrictofficialstogainanunderstandingoftheDistrict’sfinancialmanagementpractices.

• We analyzed 2012-13, 2013-14 and 2014-15 budgeted appropriations and revenues andcompared them to actual results. We calculated the results of operations for each of these years. Wealsoidentifiedaccountsthathadsignificantbudgetvariances.

• Weanalyzedfundbalancefor2012-13through2014-15anddeterminedwhetherappropriatedfund balance and reserves were used as budgeted.

• We calculated unrestricted fund balance as a percentage of the following year’s budget. We included both appropriated fund balance and unrestricted fund balance in our calculations.

• Wereviewedthe2016-17budgetandcomparedittothe2015-16budget.Wedocumentedanyincreases or decreases to selected appropriation and revenues codes.

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,ChiefExaminerOfficeoftheStateComptrollerOne Broad Street PlazaGlensFalls,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

Documents

Depew Union Free School District - Financial Condition · Budget 4% 4% 4% The District appropriated an average of $2.4 million in unrestricted fund balance as a financingsource in