Although we did not find any material discrepancies, the Board and District officials need to improve controls over the payroll process. Specifically, District officials have not provided employees with written procedures over payroll, did not adequately segregate payroll duties or establish sufficient compensating controls, did not adequately review payrolls before certifying them and did not pre-approved overtime and leave requests as required. We reviewed payroll payments along with applicable supporting documentation for 35 employees, of the District's 373 employees, totaling approximately $729,000 during three separate months to determine if the employees' salaries and wages were paid accurately. Except for minor discrepancies, which we discussed with District officials, employees' salaries and wages were paid accurately. We also analyzed the District's six reserves with reported balances totaling approximately $9 million as of June 30, 2015 for reasonableness and adherence to statutory requirements and determined that all reserves were properly established. However, only two of the reserves (tax certiorari and retirement contribution) have been used over the last five years. The other four reserves have not had any funds added or used over the last five years except for accumulated interest allowed by law. There was no evidence that the Board has periodically assessed these four reserves for necessity. Additionally, there was no clear plan for the future use of any of the District's six reserves. The Board President told us that the Board has not adopted a formal plan for the use and funding of reserves.

The Board and District officials have not ensured internal controls over information technology (IT) are appropriately designed and operating effectively. The Board did not establish adequate IT policies and procedures. District officials did not maintain accurate and up-to-date IT hardware inventory records. We also found that service level agreements for IT consultants do not adequately identify who is responsible for various aspects of the District's IT environment. District officials have also not ensured that District employees received adequate cyber security training. Finally, we identified significant weaknesses in the District's web filter and its implementation. As a result, the Board does not have adequate assurance that the District's IT assets are secure.

From fiscal years 2012-13 through 2014-15, the Board overestimated appropriations by an average of $1.4 million or 15 percent and appropriated an average of $1 million in fund balance annually in its adopted budget. These practices made it appear that the District was in compliance with the statutory limit on unrestricted fund balance. However, because the Board overestimated appropriations in each of these years, the District generated operating surpluses and, therefore, none of the appropriated fund balance was actually used. After factoring in the unused appropriated fund balance, the recalculated unrestricted fund balance over the three-year period averaged 13.6 percent of the ensuing years' appropriations. Lastly, District officials did not adopt a multiyear financial or capital plan.

The Board has not established a fingerprinting policy. As a result, School officials allowed employees to be hired and have contact with students prior to receiving fingerprint clearances and allowed independent contractors to have contact with students without first verifying they held a valid clearance. These practices increase the risk to student safety.

We found that District employees' wages and salaries were properly paid. We reviewed payroll payments totaling $3.6 million made to 40 employees during our audit period and, except for minor discrepancies, which we discussed with District officials, we found that the employees' salaries, wages and leave time were accurately paid. However, even though District officials implemented specific procedures to ensure employee leave accruals were earned in accordance with Board-authorized amounts, they were not followed consistently. Time sheets were modified without employee re-certification and leave accrual usage input into the District's financial system (System) were not reviewed for accuracy. As a result, some employee leave records were not accurately tracked, resulting in discrepancies between employee time sheets and the System.

The District has maintained unrestricted fund balance in the general fund at the statutory limit for the past two fiscal years. The Board used appropriated fund balance to finance its adopted budgets and incurred planned operating deficits totaling $7.4 million from 2012-13 through 2014-15. As of February 2016, the District projected a $1.8 million operating deficit for the 2015-16 fiscal year, which it plans to finance with reserve funds instead of appropriated fund balance. In an effort to end the decline in fund balance and maintain it at a healthy level, the Board also reduced appropriations by about $3.3 million in the 2016-17 adopted budget and did not appropriate any fund balance or reserve funds to finance the budget. Going forward, the District will need to plan for a number of factors that will affect its future finances, including declining PILOT revenue, employee contract negotiations, likely increases in health insurance costs, and a receivable from the school lunch fund that is expected to be largely uncollectible. However, the Board currently does not have a formal multiyear financial plan, which would help guide the Board as it faces future economic and environmental challenges. The District also does not have an effective process in place to identify all nonresident foster students receiving educational services from the District. Due to weaknesses in the District's identification and billing process, the District did not bill and receive about $237,000 from other school districts for eligible nonresident foster children who received educational services during the 2012-13 through 2014-15 fiscal years. Additionally, the District had 10 nonresident foster students eligible for tuition reimbursement for the 2015-16 fiscal year. If the District takes prompt action to bill the districts of origin for these students, we estimate the District could receive between $47,000 and $125,000 in tuition reimbursements, depending on the length of time the students remain enrolled during the 2015-16 school year.

The District is serving nutritious meals to its students. However, the meals cost more to prepare than the revenue generated by the meal sales. Furthermore, the school lunch productivity is lower than industry standards. These deficiencies have resulted in the District school lunch fund reporting a deficit total fund balance of $452,041 as of June 30, 2015, despite annual $50,000 subsidies from the general fund. If the District could reduce or eliminate the need for these operational subsidies, those resources could be used for other District purposes.

District officials have established adequate procedures over the claims processing function to ensure that claims are adequately documented and supported, are for appropriate purposes, and are audited and approved prior to payment. We commend District officials for establishing effective procedures for processing claims against the District. Establishing and adhering to effective claims auditing procedures decreases the risk that errors or irregularities in processing and paying claims could occur and not be detected in a timely manner.

The Board did not adequately manage the District's finances by ensuring budgets were realistic and by properly planning for and using fund balance. The District generated a cumulative operating surplus of $720,000 from fiscal years 2012-13 through 2014-15. Although District officials appropriated $2.6 million of fund balance to help finance the budget each year, none of it was needed because District officials overestimated appropriations each year by an average of $2.7 million, or 4 percent. When unused appropriated fund balance is added back, unrestricted fund balance exceeded the statutory limit by amounts ranging from $2 million to $2.4 million, or 2.9 to 3.6 percentage points. District officials also improperly set aside more than $6.5 million in a debt reserve. During the last three fiscal years, District officials have transferred more than $1.3 million from unrestricted fund balance to the reserve. Had District officials accounted for these funds properly, unrestricted fund balance would have further exceeded the statutory limit. Despite the significant amount of accumulated fund balance, District officials have increased the tax levy by more than $5 million (13.7 percent) from 2012-13 through 2015-16. Furthermore, because District officials did not properly analyze cash flow, they unnecessarily issued $6 million of short-term debt each year, incurring $81,000 in debt issuance and interest costs over the past four years.

During our audit period, District officials awarded seven professional service contracts totaling almost $1.1 million without the benefit of competition, as required by the District's procurement policy. Officials did not comply with the District's policy when procuring goods and services below the competitive bidding threshold for 19 purchases totaling $119,130 or with General Municipal Law bidding requirements and District policy for two purchases totaling $62,153. As a result, the Board does not have adequate assurance that these goods and services were procured in the most economical way and in the best interests of its residents.

Generally, the Board and District officials have effectively managed the District's finances. However, the new PILOT agreement and recent tax certiorari ruling may present financial challenges in the upcoming fiscal years if mitigating steps are not taken. In 2010-11, the expiring PILOT agreement with the nuclear power plant (NPP) generated additional real property tax revenue of approximately $13.5 million for the 2011-12 fiscal year. Since the 2011-12 fiscal year, the NPP has filed tax grievances regarding the assessment of the property and associated tax bill while the District attempted to renegotiate a PILOT agreement. In case of an unfavorable tax grievance ruling, District officials funded two reserves, starting in 2011-12, with operating surpluses. From the end of the 2010-11 fiscal year through 2014-15, the District's two reserves associated with the NPP increased by $15.2 million (180 percent). The NPP dropped its grievance in April 2016 and entered into a new PILOT agreement with the District, set to expire in 2020-21. Based on the terms of this agreement, the District will receive approximately $18 million over the next five years compared to the $63 million received over the previous five years. Using the terms of the new PILOT agreement, we projected the results of operations the District may expect if it does not continue to control expenditures. In addition, since the PILOT agreement payment decreases annually, the reserves will need to be used as a budgetary financing source. However, since fund balance is a finite resource, continued reliance on it will eventually be detrimental to the District's financial stability. Based on our projections, at the conclusion of the 2019-20 fiscal year, the selected reserves and unassigned fund balance will be depleted if projected expenditure growth is not curtailed. Without a long-term financial plan for continuing to decrease expenditures, District officials may need to consider other options to fund the financing gap.

Our audit disclosed areas in need of improvement concerning IT controls. Because of the sensitivity of this information we do not discuss the results in this report, but instead communicated them confidentially to District officials.

The Board and District officials need to improve their management of the District's financial condition. The Board adopted budgets for fiscal years 2011-12 through 2014-15 that appropriated a total of $28 million in fund balance to finance operations. However, because they underestimated revenues by a total of $9.8 million and overestimated appropriations by a total of $26.6 million over that period, District officials used only $4 million (14 percent) of the appropriated fund balance. During this period, the District also increased the tax levy by $10 million, or 8.8 percent. We also found that the Board properly reported encumbrances for the 2013-14 and 2014-15 fiscal years.

The Board did not adopt written policies and procedures for the District's cash receipts and disbursement processes. However, the Treasurer generally accounted for cash receipts and disbursements properly and the Board provided adequate oversight. Press-numbered duplicate receipts were issued for all money received by the District and deposits were typically made each week.

The District had instituted a compensating control of having the Superintendent review and certify the final payroll registers. However, the Superintendent's reviews are not extensive enough. The Superintendent does not trace payroll amounts to source documents (i.e., time records) to ensure that payments were based on the actual hours or days worked. In addition, he did not verify, at least on a sample basis, that payments were based on Board-authorized hourly rates or annual salaries. Although we did not find any discrepancies, the lack of adequate oversight of the payroll clerk's work increases the risk that errors or irregularities could occur and remain undetected.

BOCES had 161 employees who retired, resigned or otherwise left employment during our audit period. We reviewed the terms of separation for each employee to identify those eligible for a separation payment and to determine whether the payments were properly calculated per Board-approved contract terms. We found 28 of these employees were eligible for separation payments totaling $336,712. While these payments generally conformed to the terms of these written agreements, BOCES officials underpaid one former employee approximately $5,200. BOCES officials did not use an accurate daily pay rate to calculate this former employee's payment for 31 unused vacation leave days. The assistant used a prorated six-month salary instead of this employee's full base-year salary to calculate the daily rate. As a result, the assistant used a lower daily rate to calculate the separation payment.

The Board needs to improve the claims auditing process. The District paid some claims without the prior approval of the responsible claims auditor. In addition, the claims auditor approved payments for non-BOCES claims that did not have adequate supporting documentation, lacked sufficient evidence showing that the goods or services were received and exceeded the authorized purchase order amount.

District officials are generally managing fund balance effectively and the Board has adopted reasonable budgets. However, we identified improvement opportunities and areas the Board should continue to monitor. District officials have reduced unrestricted fund balance to within the statutory limit. However, the Board did not appropriately budget for certain expenditures totaling approximately $1.4 million (2.6 percent of 2015-16 appropriations) and did not properly monitor spending during the year. As a result, the District is at risk of incurring expenditures in excess of 2015-16 appropriations and depleting its remaining unrestricted fund balance. We reviewed the 2016-17 budget and found that the District is taking positive steps toward replenishing fund balance. The District's 2016-17 budgeted appropriations increased by about $2 million or 3.8 percent but estimated State aid revenues also increased by more than $4 million or 33 percent. Therefore, the Board did not appropriate fund balance and was able to lower the tax levy slightly (less than half of 1 percent). Finally, we reviewed the District's reserve funds and found that the District improperly used more than $330,000 from one reserve and overfunded two reserves with balances totaling $954,000.

Although the Board adopted a procurement policy that required obtaining competition for purchases not subject to bidding requirements, the purchasing agent and claims auditor did not always ensure that purchases were made in compliance with the requirements of this policy or require District officials to properly document compliance when they sought competition. Furthermore, the policy did not establish procedures for procuring professional services. We selected a sample of 20 vendors who were paid approximately $433,000 during the period July 1, 2014 through January 6, 2016. District officials could not demonstrate that they sought competition when procuring professional services from four vendors who were paid approximately $42,000. District officials also did not comply with the provisions of the procurement policy when purchasing goods from four other vendors who were paid approximately $30,000.

District officials have put controls in place to ensure that moneys are collected, recorded and deposited properly. During our audit period, the District recorded receipts totaling $349,093. We traced 30 receipts totaling $40,203 from the District's press-numbered receipt book to bank statements to determine if the deposits were intact and recorded accurately. We found all cash receipts were recorded accurately and deposited intact. Press-numbered triplicate receipts are generally issued at the District office for all moneys received. However, District officials told us that they do not issue a press-numbered triplicate receipt for moneys received in building locations other than the District office. In addition, the District's cash receipts policy indicates that funds are to be deposited without delay, but it does not specify a maximum limit for the time between receipt and deposit. Our audit test of 30 receipts included eight receipts that were held between 11 and 30 days before being deposited in the District's bank accounts. These discrepancies occurred because District officials had not adequately implemented procedures to ensure that money received was properly receipted at building locations or deposited in a timely manner. Additionally, the Board-adopted cash receipts policy did not clearly indicate a time limit for depositing receipts into the District's bank accounts.