Wayland-Cohocton CSD Business Office

The Wayland-Cohocton Central School District is in receipt of the draft audit report “Financial Conditions and Procurement” for the period July 1, 2007 through June 30, 2009 prepared by the Office of the State Comptroller. On behalf of the Board of Education and the District’s administration, we would like to thank the local field staff of the Comptroller’s office. They were professional and courteous in working with our business office and other District staff. The District welcomes the feedback provided by the Comptroller’s office and appreciates the opportunity to strengthen our practices as a result of reflection on that feedback.

The District is pleased that the draft report does not suggest any malfeasance or legal impropriety with respect to the District’s general business operations. We have carefully reviewed the findings and recommendations presented both internally as well as with our outside independent financial and legal advisors. To the extent that the Comptroller’s audit represents an examination of the District’s business operations and statutory and regulatory compliance, we appreciate this opportunity to review our financial management practices and oversight. As is noted more specifically below, we will take appropriate corrective action in certain areas.

However, the audit report contains a number of conclusions and broad statements that we believe reflect subjective opinions of the Comptroller’s office with respect to the District’s financial management specifically as they relate to financial planning, reserve funds, and fund balance management. In reviewing the recommendations, we carefully considered your perspective in these areas. That being said, however, the elected Board of Education and the District’s administration firmly believe that our overall approach to financial management:

Is consistent with our legal authority under both the Education and General Municipal laws and accompanying regulations;
Has been reviewed by and is consistent with the guidance from the District’s external auditor;
Is consistent with our fiduciary responsibility to our taxpayers, students, and employees; and
Has been clearly communicated to our taxpayers.

We are concerned that the overall tone of the audit report seems inconsistent with the philosophy set forth by the Comptroller’s office itself in the guidance document Local Government Management Guided – Reserves. (LGMG). That document states:

In our personal lives, saving or putting money aside to finance future needs is a common practice. Unquestionably, strong arguments can be advanced for accumulating funds. The disputable philosophy, “live for today and let tomorrow take care of itself” can easily be refuted with many savings slogans such as “prepare for a rainy day.”

These practices are equally important for New York’s local governments. Legally established reserves can provide many benefits to municipalities and their citizens. Available moneys can be set aside to finance all or part of planned projects, thereby reducing the need to issue costly debt. Reserves can provide a degree of financial stability. In certain economic times, reserve funds may give managers options other than cutting services or raising taxes. In good times, moneys not needed for current purposes can often be set aside for future benefit. (LGMG – at p. 1, emphasis added).

The guidance goes on to state the following:

Municipalities, like any other entity, need to accumulate funds for future contingencies. However, if the adopted budget is on the mark total revenues plus appropriated fund balance would equal total expenditures with a zero fund balance remaining at the end of the fiscal year, leaving nothing to accumulate. In accordance with state statutes, many municipalities may include in their budgets an amount for estimated unappropriated, unreserved fund balances for each fund. Such estimate may not exceed a reasonable amount, consistent with prudent budgeting practices, necessary to ensure the orderly operation of the government (see Town Law, § 107[1][b], Village Law, § 5-506[1][c], and County Law, § 355[1][g]).

Fortunately, municipalities are not precluded from setting aside and accumulating funds. This is accomplished by establishing reserve funds, which provide a means for raising money today, investing it and spending the money and earnings in the future. The decision to establish reserve funds, other than “mandatory” reserves, is left up to the governing board of each municipality. The purpose of the chapter is to offer a reference document on legally authorized reserve funds. Hopefully, it will serve to acquaint officials with legal requirements so that the establishment and use of reserve funds comply with the law. (LGMG – at p. 2, emphasis added).

It is with these principles in mind that we have considered and now respond to the various recommendations.

RESPONSE TO SPECIFIC RECOMMENDATIONS

Comptroller Recommendation No.1

The Board and District officials should develop fund balance and expenditure estimates for the annual budget that are realistic.

The budget is the most thoroughly reviewed and most important financial document in the District. Throughout the report the Comptroller suggests that the District be more realistic when estimating fund balance and appropriations when preparing its budget, which would conceivably lower property taxes.

The District believes in conservatively estimating revenues and expenses which stabilize taxes, establishing a consistently low level of tax increases rather than creating a fluctuating tax rate that would burden our tax payers and consequently impact constituent support and related items such as our bond rating. Through these budgeting practices, the District has been able to provide its taxpayers a high level of consistency and predictability. Over the last 17 years the District has averaged a tax increase of just 1.7% per year. In contrast, the C.P.I. over that same time frame has averaged 2.74%

Insofar as overestimating budgetary appropriations, the Comptroller’s report suggests the Board of Education does not effectively estimate its annual spending plan. Estimates of expenditures are based on facts known at the time of budget planning and adoption. Unfortunately, events occur subsequent to the Board adoption date that results in a decrease in expected expenditures that cannot be adjusted. There are a number of factors during budget planning that impact expenditure estimates. In the area of special education, our estimates must account for the following variables:

A significant number of students transfer to Wayland-Cohocton from neighboring school districts. Many of these students were serviced in a self-contained setting in their previous school district and arrived with IEP mandates such as 1:1 aide support, transition services, and specialized accommodations.
The number of students identified as autistic has increased dramatically over the past 5 years. Each student with autism requires a specialized program with a high frequency of related services.

Special Education costs are among the highest and most volatile in the budget. The District believes that taking a cautious and conservative approach to estimating appropriations will prevent a financial deficit when students unexpectedly enroll or new classifications occur after the budget has been finalized. This type of cost usually has no offsetting revenue in the enrollment year to cover the cost of such placement.

The most volatile and expensive portion of the budget is employee benefits. Health care costs are not finalized until after budget adoption. In addition these costs have been very unpredictable over the past several years forcing the District to estimate costs accordingly. In addition to health care costs, the District also has the challenge of pension rates that are equally challenging to budget for. For instance, in the upcoming budget it is anticipated that pension costs will increase by 30 percent, and this is an expense that the District has no control over. These areas require a conservative approach with their potential for dramatic increases that have a significant budget impact.

The comptroller’s report also pointed out the District does not end up using the appropriated fund balance as a revenue source. Although The District does not dispute this, we feel our budgeting practices are fiscally responsible and as indicated by our tax levy increase history, is in the best interest of the taxpayers. One of the primary reasons this has occurred is due to underestimated revenues from State Aid and interest income. There are solid reasons for our estimates in those two areas. With regard to State Aid, the number reported on various State budget runs is never equal to the actual State Aid received by the District. Actual State Aid is always lower, and is heavily dependant upon enrollment, which has been declining over the past five years in the District. We follow the State Education Department recommended budget calendar, which usually doesn’t allow for an approved State budget figure for school aid, until after our Board has adopted the budget. Furthermore, some state aid revenue, like BOCES and transportation aid is expense driven. Exact aid amounts are difficult to estimate and districts must protect against potential deficits. BOCES aid is traditionally a major discussion item for reduction or freezing during the state budget process. The prudent school district should not count on significant increases in this budget category.

In light of the extremely turbulent fiscal condition of New York State and the potential for large decreases in State Aid that all school Districts are facing, the budgeting practices exercised by the District appear prudent and fiscally responsible. It is true these practices have resulted in budgetary surpluses. However, the surplus was utilized to fund reserves and will be used next year and in subsequent years as budgeted revenue to maintain the level tax levy that our community has grown to expect.

Comptroller Recommendation No. 2

District officials should develop a more comprehensive policy related to their use of reserve funds. This policy should establish optimal or targeted funding levels and the conditions under which the funds will be utilized or replenished.

Comptroller Recommendation No. 3

To the extent Possible, District Officials should include both the funding and use of all reserves in their adopted budget plan each year to provide increased knowledge and transparency for the District’s voters.

The Board of Education will establish a policy to conduct an annual review of all reserve funds as part of the budget process. During this review, the Audit Committee and the Board will review a listing of each reserve and the funds therein, learn of any payments made from each reserve in the recent past, receive a briefing on the statutes related to the reserve and any limits on funding or spending the funds, and receive an analysis of projected needs for the reserves in the upcoming fiscal year and make a recommendation on how to fund those needs.

Comptroller Recommendation No. 4

District Officials should ensure reserve funds are used with accordance with statutory provisions.

Comptroller Recommendation No. 5

The Board and District officials should review all reserves and determine if the amounts reserved are necessary, reasonable and in compliance with statutory requirements.

It is our view that the Comptroller’s recommendation is overboard and suggests that the Board has not been appropriately overseeing the financial management of these reserves. First, we want to assure the District’s taxpayers that the Board and administration review all reserves on a regular basis and consider the overall financial picture of the District when funding such reserves and setting the tax levy. This has been our practice since at least 1995 when our most senior administrator (the business manager) came into office. Additionally, the field auditors only requested minutes of our Board meetings as the basis for their conclusion that review by the Board of Education was lacking. That finding is simply incorrect. Substantiating facts from the Board President and Superintendent as to the substance of the deliberations on reserves could have been provided, had the field staff simply asked to speak to the participants. Minutes are not a verbatim transcript; they are only a summary of action and cannot capture the depth and substance of the review this Board conducted.

School Districts do not exist in a financial vacuum. A review of our bond prospectus shows that our rating for long term debt we have financed enjoys an outstanding rating for a school of our size and poverty. A factor in this rating is the existence of our reserve funds. Thus the assertion that we did not think of District taxpayers when we established reserves belies the reality of our actions. Because we have reserves, the net result is lower borrowing costs to our taxpayers, which has the net effect of reducing property taxes.

Furthermore, the District believes all of the reserve funds were established as per regulations in General Municipal Law § 6 and Education Law § 3651. All of the reserve funds in question were created by resolution of the Board of Education. The District has researched legal references for the recommended balances and appropriations to the reserve funds, and we find no area in which we did not handle our reserves in an appropriate manner. In addition, in review of our external audits during the period of the Comptroller’s audit, all actions and balances regarding reserve funds were determined to be appropriate.

Comptroller Recommendation No. 6

District officials should develop a plan for the use of the surplus balances in the District’s reserve funds and debt service report indentified in this report in a manner that benefits District taxpayers. In order to provide a transparency, the use of these surpluses should be done through the budget process with public disclosure. Such uses could include, but are not limited to:

Increasing necessary reserves
Paying off Debt
Financing one-time expenditures
Reducing District property taxes

We feel that we do use surplus in ways that are beneficial to our taxpayers. We do use surplus to increase necessary reserves, finance one-time expenditures, and reduce District property taxes. In fact, the District’s tax levy remained flat for the 2009-2010 fiscal year and was only up slightly over 2% for the 2008-2009 fiscal year. This is another area in which it would have been helpful for the field staff to approach key personnel. In a short conversation clear examples could have been given on how the District was in fact already using the strategies listed in the recommendation above.

Comptroller Recommendation No.

The Board and District officials should transfer moneys in the trust and agency fund back into the general fund.

The moneys in question were transferred into the trust and agency account in the 6/30/06 audit based on a recommendation from the District’s external audit. The moneys were designated for a known liability the District was going to be responsible for. Although the District is being told they need to account for this liability, according to Education Law there is no place for this money to be placed. The District would appreciate the Comptroller’s office and any work that can be done to create an appropriate reserve for the monies in question. With that said the District has reversed this entry and placed the moneys back into the general fund. The specifics of this transaction will be included within the District’s corrective action plan.

Comptroller Recommendation No. 8

To ensure the best possible price when sole bid situations arise, the District should consider re-advertising for bids, or using other methods to obtain additional quotes, such as advertising in more well circulated papers or related vendor publication, or sending bid invitations to other known suppliers.

Comptroller Recommendation No. 10

The Board should consider amending the District’s purchasing policy to only allow lease-purchases when the are necessary (funds not available) and are more cost-effective that other financing options.

Comptroller Recommendation No.1

The Board should amend its purchasing policies and adopt and implement comprehensive policies and procedure for the procurement of goods and services when competitive bidding is not required by GML. Such procedures should include, but need not be limited to the following:

Require solicitation of written price quotations for the procurement of goods and services of significant values.
Require solicitation of verbal price quotations for the procurement of goods and services of lesser values, or specified special circumstances (such as emergency situations). Verbal quotations should be documented.
Require formal documentation of the method of vendor selection, including retention of written quotes, documentation of verbal quotes, and documentation of the District’s use of State Contract pricing or cooperative bids.
Document procedures for selecting vendors who provide professional services that require special skills or training.

The District’s personnel work diligently to keep prudent controls in place to avoid any inappropriate spending of taxpayer’s dollars. The District has taken steps to clarify procedures for procurement. Our procurement policy has been updated and purchase orders are not issued unless proper quotes have been received in the Business Office. Limitations under our new policy are being better communicated and enforced. Quality, efficiency, health and safety issues that could create an exception to the Board of Education approval process are being clearly articulated and documented. In addition the updated procurement policy provides improved guidance in regards to the District’s competitive bidding process. All purchases that fall under the competitive bidding requirements are Board approved, verified, and approved by the purchasing agent and reviewed by the claims auditor before payment is made to the vendor. The District will continue to monitor the competitive bidding process as it looks for improvement in its purchasing process.

Comptroller Recommendation No. 9

District officials should monitor employees for compliance with policies and procedures, including statutory bidding requirements.

The District does not agree with this recommendation. The Comptroller’s recommendation suggests the District is not in compliance with statutory bidding requirements. Nowhere in the report do we find any instance in which this is the case. We take pride and work hard in making sure we are following General Municipal Law, including bidding requirements. We would be more than willing to correct any instance in which we did not if it was clearly shown to us.

Conclusion:

In conclusion, the Wayland-Cohocton Central School District appreciates the feedback provided by the Comptroller’s Office and views it as an opportunity to improve upon our financial practices. The District is committed to taking appropriate corrective action to correct, clarify, and/or strengthen our operating procedures in those areas of concern that were noted, and to fully comply with State guidelines.

While respectfully acknowledging that the Comptroller has, from a policy perspective, taken issue with certain aspects of the District’s fiscal approach, the District maintains that its primary financial objective is to minimize the cost of delivering a high quality education to our students. The district’s current budgeting practice and management of its fund balance and reserves is conducted in furtherance of this objective and has resulted in, by any measure, a high achieving school district within our region of the State, along with one of the lowest residential tax rates within our BOCES.

The District has already begun to implement the recommendations specified in the audit document. Our Board of Education will work to complete the corrective action plan within the given timeline and forward it to all appropriate parties. Thank you for the opportunity to review and respond to these recommendations.

Sincerely,

Michael J. Wetherbee
Superintendent of Schools

New York State Office of the State Comptroller - Local Government and School Accountability Audit