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					                                      STATE OF NEW YORK
THOMAS P. DiNAPOLI                                                                  STEVEN J. HANCOX
                            OFFICE OF THE STATE COMPTROLLER                       DEPUTY COMPTROLLER
   COMPTROLLER                          110 STATE STREET                    DIVISION OF LOCAL GOVERNMENT
                                     ALBANY, NEW YORK 12236                   AND SCHOOL ACCOUNTABILITY
                                                                           Tel: (518) 474-4037 Fax: (518) 486-6479

                                                     April 10, 2009

Mr. Raymond Walsh, Superintendent of Schools
Members of the Board of Education
South Country Central School District
189 Dunton Avenue
East Patchogue, New York 11772-5598

Dear Mr. Walsh and Members of the Board of Education:

Report Number: B7-9-6

Chapter 375 of the Laws of 2006 authorizes the South Country Central School District (District)
to issue debt totaling $4,623,721 to liquidate the accumulated deficit in the District’s general
fund as of June 30, 2005. Local Finance Law Section 10.10 requires all local governments that
have been authorized to issue obligations to fund operating deficits to submit to the State
Comptroller each year, starting with the fiscal year during which the local government is
authorized to issue obligations and for each subsequent fiscal year during which the deficit
obligations are outstanding, their tentative or preliminary budget for the next succeeding fiscal

The budget must be submitted no later than 30 days before the date scheduled for the governing
board’s vote on the adoption of the budget or the last date on which the budget may be finally
adopted, whichever is sooner. The State Comptroller must examine the tentative budget and
make recommendations for any changes that are needed to bring the proposed budget into
balance. Such recommendations are made after the examination into the estimates of revenues
and expenditures of the District prior to the approval of the budget.

The District’s Board of Education (Board), no later than five days prior to the adoption of the
budget, must review all recommendations made by the State Comptroller and may make
adjustments to its tentative budget consistent with those recommendations contained in this
report. All recommendations that the Board rejects must be explained in writing to our Office.

Our Office has recently completed an audit of the District’s budget for the 2009-10 fiscal year.
The objective of the audit was to provide an independent evaluation of the tentative budget. Our
audit addressed the following questions related to the District budget for the 2009-10 fiscal year:

       Are the significant revenue and expenditure projections in the District’s tentative budget

       Did the District take appropriate action to implement or resolve recommendations
        contained in the budget review audit report issued in April 2008?

We conducted this performance audit in accordance with generally accepted government
auditing standards (GAGAS), with the exception of reporting views of responsible officials.
Officials’ views were not solicited for this report due to the necessity of providing the District
with this time-sensitive information. However, the results of this audit have been discussed with
District officials and their comments have been considered in preparing this report. GAGAS
requires that we plan and perform the audit to obtain sufficient, appropriate evidence to provide a
reasonable basis for our findings and conclusions based on our audit objectives. We believe that
the evidence obtained provides a reasonable basis for our findings and conclusions regarding the
estimates in the tentative budget.

To accomplish our objectives in this audit, we requested your tentative budget along with other
pertinent information. We analyzed the composition of revenues and expenditures in order to
determine if the revenue and expenditure estimates are reasonable. We do not offer comments on
public policy decisions, such as the type and level of services to be provided.

The tentative budget package submitted for audit for the fiscal year ended June 30, 2010
consisted of the following:

              2009-10 Tentative Budget
              Supplementary Information

The tentative budget submitted to our office is summarized as follows:

       Fund          Appropriations         Estimated         Appropriated         Real Property
                                            Revenues          Fund Balance             Taxes
     General          $ 106,204,026        $ 50,390,256        $ 3,500,000          $ 52,313,770

Based on the results of our audit, except for as noted below, we found the significant revenue
and expenditure projections in the tentative budget to be reasonable. The District projects that its
fund balance will be $10.9 million at June 30, 2009, about $6.7 million more than the legal limit.
The District should use its surplus fund balance to benefit taxpayers and ensure its fund balance
does not exceed 4 percent of the 2009-10 fiscal year budget. The District also issued a $3 million
bond anticipation note in October 2008 without prior notice to the State Comptroller, as required
by law. Further, the District has not submitted required quarterly reports to the State Comptroller
in a timely fashion. Although District officials generally resolved the recommendations
contained in the budget review audit report issued in April 2008, we continue to recommend that
the Board revise the budget format to include actual year-to-date revenue and expenditure data
and estimated revenues and appropriations for the current fiscal year, as amended to date, to
make the budget a more useful document.

Our audit disclosed the following findings which should be reviewed by the Board for
appropriate action. Good management practices require that District officials take prompt action
concerning our recommendations. We believe that prompt action by District officials will help
to continue the improvement of the District’s financial condition.

Fund Balance

The Board and District officials can reserve, retain or appropriate fund balance as necessary and
allowable by law. Fund balance that is legally reserved for a specific statutory purpose is not
available for the District to appropriate to pay for operating costs in the subsequent year’s
budget. District officials can also retain a portion of the unreserved fund balance for cash flow
purposes or unanticipated expenditures. Real Property Tax Law limits the amount of fund
balance school districts can retain at June 30, 2009 to no more than 4 percent of the next year’s
budget. Given the District’s tentative 2009-10 total appropriations of approximately $106
million, the District’s unappropriated fund balance as of June 30, 2009 cannot exceed
approximately $4.2 million.

The District projects that its fund balance at June 30, 2009 will be approximately $10.9 million,
which is $6.7 million more than the legal limit. This surplus is mainly the result of the District’s
overestimation of appropriations for personal service costs and its receipt of PILOT 1 revenues
that District officials did not anticipate receiving in the 2008-09 fiscal year. Although the
District initially presented a budget to us that included a fund balance appropriation of $3.5
million, District officials recently informed us that they now plan to only appropriate
approximately $2 million of fund balance to help finance 2009-10 operations. The appropriation
of this amount of fund balance would leave an unappropriated fund balance of $8.9 million as of
June 30, 2009, which exceeds the 4 percent limit by approximately $4.7 million.

If the District’s fund balance at June 30, 2009 is $10.9 million, as the District expects, Division
officials should develop a plan to reduce the unappropriated fund balance to the statutory 4
percent limit within a reasonable period of time. District officials should use the surplus fund
balance in a manner that benefits District taxpayers. Such uses could include, but are not limited
to increasing or establishing legal reserves, paying off debt, financing one-time expenses, or
reducing District property taxes.

Disclosure of Debt Issuance

Local Finance Law Section 10.10 (Law) requires the Chief Financial Officer of a school district
that was authorized to incur debt to finance a deficit to notify the State Comptroller at least 15
days prior to the issuance of any bonds, notes or entering into any installment purchase contract.
The State Comptroller may review and make recommendations regarding the affordability of any
such tentative issuance or contract for the school district.

However, the District did not notify this Office prior to issuing a $3 million bond anticipation
note on October 23, 2008 to finance various capital improvements. In fact, District officials did
not notify us of this debt issuance until we were on site for this audit. Although the District can
afford the additional debt service obligation generated by the debt issued in October 2008,
District officials should continuously monitor and update their multi-year financial plans and
other financial information to help ensure the District's fiscal health continues to improve.
District officials informed us that they plan to issue more debt during the 2009-10 fiscal year to
finance various District improvements. Before District officials proceed with any debt issuance

 Payments in lieu of taxes are made to compensate a local government for some or all of the tax revenue that it loses
because of the nature of the ownership or use of a particular piece of real property.

in the future, they must comply with the Law and notify the State Comptroller prior to issuing

Retirement Systems Appropriations

The tentative budget includes appropriations of $3,890,250 for the Teachers Retirement System
(TRS) and $730,378 for the Employees Retirement System (ERS). The District did not provide
us with any documentation to support these amounts or the rates used to derive them. Based on
current information received from TRS and ERS, we projected the 2009-10 retirement bills will
total approximately $2,657,990 for TRS and $475,910 for ERS. Therefore, the District has
budgeted a total of $1,486,728 more than will be needed to satisfy these costs. The Board should
revise the amounts appropriated in the 2009-10 budget.

Quarterly Reporting

Chapter 375 of the Laws of 2006 requires the Chief Fiscal Officer to prepare a quarterly report of
summarized budget data for all of the major operating funds and submit the reports to the Board,
the State Division of the Budget, the Office of the State Comptroller, the Commissioner of
Education, the Chairman of Assembly Ways and Means Committee and the Chairman of the
Senate Finance Committee. These quarterly reports must be filed throughout each fiscal year
occurring during the time bonds and/or bond anticipation notes issued pursuant to Chapter 375
are outstanding.

Quarterly reports must be completed within 30 days after the end of each quarter and include:

      Summarized data depicting overall trends of actual revenues and budget expenditures of
       the entire budget rather than individual lines items.
      A comparison of revenue estimates and appropriations with actual revenues and
       expenditures made to date.
      Recommendations by the Superintendent to the Board, setting forth any remedial action
       necessary to resolve any unfavorable budget variances.
      A trial balance prepared in accordance with generally accepted accounting principles.

The District has never submitted quarterly budget reports to the State Comptroller in a timely
manner. In fact, in most recent instances, our Office needed to contact the District to request the
reports. For example, the three most recent quarterly reports were submitted as follows: the last
quarter of 2007-08 was submitted 19 days late, the first quarter of 2008-09 was submitted 105
days late and the second quarter of 2008-09 was submitted 38 days late.

District officials should develop clearly defined procedures for monitoring and updating their
budget and other financial information to confirm that the District's fiscal health is continuing to
improve. Such monitoring will allow District officials to promptly identify any necessary
corrective action in the event of unanticipated financial problems. The Board should ensure that
District officials submit quarterly updated reports in compliance with the timeframes set in
Chapter 375.

Format and Content of the District Budget

In order for the District’s budget document to be a useful tool to District officials and the
residents of the District, it must contain sufficient information regarding the District’s annual
financial plan. The District’s tentative 2009-10 budget document included actual expenditures
for the four fiscal years ending June 30, 2008, the adopted budget from 2008-09 and the tentative
2009-10 budget. It did not include any information as to actual revenues and expenditures for the
current year-to-date and projected revenues and expenditures through the end of the current
fiscal year.

Although District officials implemented some of the recommendations noted in our budget
review letter issued in April 2008, we continue to recommend that the Board revise the budget
format to include the actual revenues and expenditures for the current year-to-date, and revenue
estimates and appropriations for the current fiscal year as amended to date. This information
allows for the tentative budget to be evaluated in light of the prior year’s results of operations
and the current year’s budget.

The Board has the responsibility to initiate corrective action. Pursuant to Section 10.10 of Local
Finance Law, the Board shall review the recommendations in this report and may make
adjustments to its tentative budget. The Board must explain in writing to our office any
recommendations that it has rejected. In addition, pursuant to Section 35 of the General
Municipal Law, Section 2116-a (3)(c) of the Education Law and Section 170.12 of the
Regulations of the Commissioner of Education, the Board must approve a corrective action plan
that addresses the findings in this report, forward the plan to our office within 90 days, forward a
copy of the plan to the Commissioner of Education, and make the plan available for public
review in the District Clerk’s office. For guidance in preparing your plan of action and filing this
report, please refer to the attached documents.

We request that you provide us with a copy of the adopted budget.

We hope that this information is useful as you adopt a budget for the District. If you have any
questions on the scope of our work, please feel free to contact our Jeffrey P. Leonard, Chief
Examiner of our Hauppauge Regional Office, at (631) 952-6534.

                                                     Very truly yours,

                                                     Steven J. Hancox
                                                     Deputy Comptroller

cc:   Michael Buzzeo, Interim Assistant Superintendent for Business
      Judeth Degree, District Clerk
      Edward J. Zero, Superintendent – Eastern Suffolk BOCES
      Hon. Carl Kruger, Chair, Senate Finance Committee
      Hon. Herman D. Farrell Jr., Chair, Assembly Ways and Means Committee
      Hon. Patricia A. Eddington, State Assembly Representative
      Hon. Brian X. Foley, State Senator
      Laura L. Anglin, Director, Division of the Budget
      Richard P. Mills, Commissioner, State Education Department
      James Conway, Director, Office of Audit Services, State Education Department
      Jeffrey P. Leonard, LGSA Regional Chief Examiner