The Board and District officials need to improve the budget process to ensure that adopted budgets are reasonable, allowing them to effectively manage the District's financial condition. The Board overestimated appropriations in the adopted budgets in four of the past five years. This generated almost $4.3 million in combined operating surpluses from 2010-11 through 2014-15. While the Board used operating surpluses to fund various reserves and capital projects, they also appropriated an average of $1.8 million in fund balance as a financing source in the annual budgets over this period. However, District officials used appropriated fund balance to fund operations in only one year. As a result, 84 percent of the amount appropriated was not needed due to operating surpluses. When the unused appropriated fund balance is added back to fund balance, the District's recalculated unrestricted fund balance ranged between 10 and 12 percent of the ensuing year's appropriations, exceeding the 4 percent limit in the last four fiscal years.

District officials employed budgeting practices that generated operating deficits, but only used a fraction of the appropriated fund balance to fund operations. This resulted in fund balance appropriations that were not needed. As a result, during the 2012-13 through 2014-15 fiscal years, the District's unassigned fund balance was 9.65 to 12.35 percent of the ensuing years' budgets, while the statutory limit for fund balance was 4 percent. In addition, the Board transferred moneys to the District's reserves without calculations or justifications for the funding levels in the reserves and maintained balances in the unemployment insurance reserve and workers' compensation reserve that were excessive because those balances could fund related costs for 15 years and six years, respectively. These budgeting practices increase the risk that funds will not be used productively and that tax levies will be higher than necessary.

The Treasurer did not comply with the bylaws that require getting approval before making disbursements, even though all Company checks had two authorized signatures. The Treasurer provided the Board with a list of cash disbursements on each monthly Treasurer's report for bills that were previously paid. However, other than the Treasurer, Company officials did not review documentation supporting each cash disbursement to ensure payments were for valid Company purposes. Therefore, we reviewed all cash disbursements for our audit period, consisting of 106 disbursements totaling $17,665, which included 92 checks totaling $17,285 and 14 petty cash disbursements totaling $380. We found that 28 disbursements totaling $5,293 were not adequately supported, which prevented us from determining if these disbursements were for valid Company purposes.

While Council and City officials have taken certain steps to improve the City's operations and reduce its related costs, they did not ensure that all City operations were functioning at the lowest cost to taxpayers. Refuse expenditures consistently exceeded revenues and health insurance expenditures have increased. Furthermore, through 2014, the City's outstanding debt included payments for items that are beyond their useful lives. City officials were aware of these issues and are developing plans to reduce these expenditures. In addition, we identified a number of opportunities related to non-property tax services that could help improve the City's fiscal health. Specifically, we identified opportunities for City officials to consider for sewer and refuse operations, building permits, parking operations and, potentially, gross receipts tax revenues.

District officials need to improve the budget process to ensure general fund budget estimates and fund balance are reasonable. From 2010-11 through 2014-15, District officials planned operating deficits and appropriated $11.7 million of fund balance each year. However, because officials' consistently overestimated expenditures, the District experienced operating surpluses totaling more than $4 million over these years and, therefore, used only $115,765 (1 percent) of the appropriated fund balance to finance operations. District officials also set aside $3 million in four reserves that have not been used. Unrestricted fund balance for these five years ranged between 13 and 15 percent of the ensuing year's appropriations, exceeding the statutory limit. As a result, District officials missed the opportunity to reduce the tax levy.

The District needs to improve its controls over payroll processing. Although the payroll clerk performs procedures to double check her own work, the review process should involve someone independently reviewing payroll prior to processing. Such a review could include comparing payroll source documents, such as signed time sheets, to payroll reports to verify that hours or days worked agree and reviewing payroll change reports which show the changes from one payroll to the next. Although we did not identify any material discrepancies, the lack of adequate oversight of the payroll clerk's duties increases the risk that errors or irregularities in the processing of payrolls could occur and remain undetected, or not be detected in a timely manner.

The Board and District management effectively managed the District's financial condition. The District's unrestricted fund balance from fiscal years 2010-11 through 2013-14 remained consistent at approximately 1 percent of the subsequent year's appropriations. For the 2014-15 fiscal year, the unrestricted fund balance was $4,237,425, or 4 percent of the subsequent year's appropriations, which is a significant increase from prior years. The District's 2014-15 fiscal year financial position improved significantly primarily because the District sold a school building. The District sold the building for $8.5 million and put $5 million of the proceeds toward the funding of a voter-approved capital project for improvements to the high school and middle school. We also reviewed the District's 2015-16 adopted budget and determined that revenue and expenditure estimates appeared reasonable. We commend the Board and District management for taking positive action in managing the District's financial condition.

District officials have been improving nonresident tuition billing procedures. However, we reviewed all of the quarterly invoices totaling more than $2.9 million for our audit period and found that the District underbilled Ripley Central School District by $41,125. In addition, one nonresident student was not billed for $14,438 in tuition costs. District officials also do not regularly review and monitor the tuition rate being charged in comparison to net costs per student and the State-calculated tuition rate. However, we determined that the District's tuition rate appeared reasonable.

The Assistant Superintendent did not ensure that each fund's general ledger accounts were accurate, complete and up-to-date. As a result, District officials cannot be assured that the District's financial position is accurately stated. The District's general ledger contained interfund loan balances that totaled more than $16 million among different funds as of June 30, 2014. We found interfund loan balances have been carried over from year to year on the general ledger since at least 2010-11 in the capital projects and special grant funds. It is difficult to assess whether a fund's financial condition is improving or deteriorating when general ledger accounts are not correct and up-to-date.

During our audit period, the Board and District officials did not develop reasonable budgets or effectively manage the District's financial condition to ensure that the general fund's unrestricted fund balance was within the statutory limit. The Board overestimated appropriations in the 2011-12 through 2014-15 budgets, which caused the District to realize operating surpluses totaling nearly $10.5 million during those four years. In addition, during the same four-year period, the District's budgets included appropriated fund balance totaling nearly $32.7 million (an average of approximately $8.2 million annually), which should have resulted in planned operating deficits. However, because the District overestimated expenditures in its budgets, it realized operating surpluses of $10.5 million. Therefore, none of the appropriated fund balance was actually used. By not using the appropriated fund balance, the District's unrestricted funds significantly exceeded the statutory maximum of 4 percent of the ensuing year's budget. When unused appropriated fund balance is added back, the District's recalculated unrestricted fund balance was between 17 and 20 percent of the ensuing year's appropriations, which is about five times the statutory limit. The District appropriated $94.2 million for the 2015-16 budget, which included $7.06 million in appropriated fund balance. However, we project that it will not be needed. As a result, we expect that the District's unrestricted fund balance will continue to exceed the statutory limit.

The Board has developed a procurement policy. However, formal procedures for seeking competition when procuring professional services have not been developed, including documentation that supports the decisions made. Therefore, we reviewed the procurement of services from 22 professional service providers totaling $549,762. We found the District properly sought competition for services from six providers, with total expenditures of $222,605, including the procurement of services from the District's external auditor as required by law. However, there was no evidence that the District properly sought competition for services from 16 providers, with total expenditures of $327,157. Although we found that the professional services procured were for legitimate and appropriate District purposes, by not establishing procedures for seeking competition, the District does not have adequate assurance that professional services are procured in the most economical way and in the best interests of the residents.

The Board did not adopt reasonable budgets or effectively manage the District's financial condition to ensure that the general fund's unassigned fund balance was within the statutory limit. The Board adopted budgets included appropriated fund balance that was not needed as a funding source because the Board and District officials overestimated appropriations when they prepared and adopted budgets for the last three fiscal years. These budgeting practices produced operating surpluses in two of the three fiscal years year and the unassigned fund balance has exceeded legal limits all three years. As of June 30, 2015, the District's unassigned fund balance was 13.1 percent of the next year's appropriations, or $855,000 over the legal limit. The District also maintained approximately $28,600 in its tax certiorari reserve fund with no plan for its use. In addition, for three of the four District reserves, the Board has not developed a written plan that communicates to taxpayers the optimal funding levels or conditions under which the reserves will be used.

The Board and District officials should do more to ensure the accuracy of biweekly payrolls. The payroll clerks are performing incompatible duties related to payroll processing, and District officials are not sufficiently monitoring or reviewing their work. In addition, the Assistant Superintendent for Business is certifying payrolls after the payments have been disbursed, which increases the risk that the District may not detect incorrect payroll payments.

While the Board has established written regulations relating to cash receipts and non-payroll disbursements procedures, District officials and employees did not always comply with these regulations. We found that the clerk did not issue receipts for all money collected or maintain a record of all money received. In addition, there was no process in place for someone independent from the record keeping function to verify that funds were deposited into a District bank account as required by Board regulations. In addition, the Business Manager serves as the District Treasurer and has authority to sign checks, make journal entries without review, prepare monthly bank reconciliations and has full administrative rights to the District's financial system. As a result, the Business Manager has the ability to control all phases of non-payroll disbursement transactions, which could allow her to make improper transfers and payments and then conceal these activities by creating misleading entries in the accounting system. The Board and District officials have implemented compensating controls to help reduce risks such as assigning an individual independent from the Business office to review bank reconciliations prepared by the Business Manager and requiring the Superintendent to review audit trail reports generated from the financial system. However, District officials' implementation of these control procedures could be improved.

Although the Board adopted an online banking policy, District officials did not develop written procedures for online banking activities. In addition, online banking duties were not properly segregated and account accessibility was not completely controlled. Furthermore, the Treasurer and Business Office Clerk did not use proper procedures when accessing online banking sessions. Finally, the Treasurer and Business Office Clerk did not receive appropriate online banking training.

Prior to the 2015-16 fiscal year, the District had a contract with the Greenwood Lake Union Free School District (GWL) to provide secondary education to approximately 200 students at $12,240 per student, or about $2.4 million annually. The GWL contract was phased out over the two-year period of 2013-14 and 2014-15. As a result, the District's enrollment declined significantly over the past three fiscal years. Along with the decline in students, the District's revenue declined drastically. The Business Administrator did not ensure that the Board received accurate financial information. We found errors in accounting for financial transactions resulting in a misleading picture of the District's financial condition. For example, account receivables are overstated by as much as $602,000 and reported cash balances were overstated in one month by over $1.1 million. In addition, reserve fund moneys were commingled with other moneys and the District appropriated over $100,000 more than available from certain reserve funds to fund the 2015-16 budget. In addition, the Board's adopted budget for 2015-16 is structurally imbalanced. Depending on the results of operations, the District may end 2015-16 with a deficit at year end. Finally, the Board did not develop a multiyear financial plan to address the District's decline in enrollment and financial condition. As a result, the District's financial condition has been diminished.

The Board did not adopt structurally balanced budgets or properly manage fund balance. The Board consistently adopted budgets that appropriated fund balance to finance operations without a clear understanding of the amount of fund balance available to appropriate. As a result, the total fund balance in the general fund declined by over $1.5 million, or 70 percent during the past four years. As of June 30, 2015, the District's unrestricted fund balance was $143,945, or 0.6 percent of the ensuing year's appropriations.

The Board and District officials have not effectively managed the District's fund balance and reserves. The District's year-end unrestricted fund balance has exceeded the statutory limit for the past three years. As of June 30, 2015, the District's unrestricted fund balance was 9.2 percent of the next year's appropriations, or $2.6 million over the legal limit. Furthermore, the District overfunded the employee benefits accrued liability reserve by about $7.1 million and the tax certiorari reserve by about $1.5 million as of June 30, 2015. Consequently, the District has accumulated approximately $11.2 million in excess funds, representing 22 percent of the 2015-16 budget. The accumulation of these excess funds has resulted in the District's tax levy being higher than necessary to sustain District operations. Finally, District officials have not established a formal multiyear financial or capital plan to help ensure that these excess funds are properly used to benefit District residents.

We found that District employees received and used leave accruals in accordance with individual employee contracts and collective bargaining agreements. District officials implemented specific procedures to ensure employee leave accruals were earned in accordance with the employee's applicable contract. We also found District officials established effective procedures to ensure the accrual and use of leave time were recorded accurately. We commend District officials for designing and implementing adequate procedures for the accrual and use of leave time.

District officials did not maintain fund balance in accordance with statutory requirements. The District's unassigned fund balance has exceeded the statutory limit in two of the last three fiscal years. In an attempt to comply with the 4 percent limit, upon advice of their certified public accountant, District officials erroneously classified almost $1.2 million of surplus funds as other restricted funds and in a reserve for tax reduction. For the 2012-13 fiscal year, $873,000 was classified as other restricted fund balance, and for the 2013-14 fiscal year, $315,000 was classified as a reserve for tax reduction. As a result of these errors, the District's unassigned fund balance did not include funds that should have been included when calculating the statutory limit. During 2014-15, District officials reported these funds as unassigned fund balance after they realized these funds were truly unassigned. Currently, officials have no plans to expend these excess funds.