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. From fiscal years 2011-12 through 2014-15, the District improperly calculated its unrestricted fund balance and spent nearly $23.8 million (93 percent) less of appropriated fund balance and reserves than were budgeted to finance operations. As a result, the District's recalculated year-end unrestricted fund balance averaged about 9.4 percent of the next year's budgetary appropriations over the last four years, which is more than two times the statutory limit. In addition, the retirement contribution, liability, employee benefit accrued liability and unemployment reserves, totaling about $18 million, appear to be overfunded or unwarranted. Finally, the Board and District officials have not developed a multiyear financial plan.

District officials did not establish adequate procedures for processing payroll. The School Business Official's duties were not adequately segregated because she was responsible for collecting employees' time records; recording the hours worked or salaries to be paid; making changes to employees' pay rates, withholdings and deductions; performing transfers between the District's bank accounts for payroll purposes and preparing and executing the employees' direct deposits. The School Business Official performed all of these duties without sufficient oversight. The District Treasurer (Treasurer) was responsible for reviewing transfers between the District's bank accounts and printing and signing employees' payroll checks. However, the Treasurer's limited role related to processing payroll did not provide sufficient oversight of the School Business Official's work to mitigate the risks incurred due to her incompatible duties. The Superintendent also provided an independent review of the payroll process by reviewing and certifying the final payrolls. However, the Superintendent's reviews were not adequate because he did not compare payroll registers to payroll source documents (i.e., time records) to ensure that payments were based on the actual hours or days worked and Board-authorized hourly rates or annual salaries. No one reviewed the source documents to verify whether the School Business Official accurately processed payrolls.

The Board and District officials did not ensure that the unrestricted fund balance and the capital reserve fund balance were reasonable. As of June 30, 2015, the District's unrestricted fund balance totaled more than $1.4 million and was 7.5 percent of the 2015-16 budgeted appropriations, exceeding the statutory limit by 3.5 percentage points. District officials also appropriated a combined total of approximately $1.7 million of fund balance as a financing source in the annual budgets from 2011-12 through 2015-16, but the District's operations did not always use the fund balance and instead generated operating surpluses totaling approximately $745,000 during this period. When adding back the unused appropriated fund balance during this period, the District's unrestricted fund balance further exceeded the statutory limit ranging from 6.7 percent to a projected 9.6 percent of the ensuing year's appropriations. Furthermore, although we found that the balances maintained in the compensated absences reserve and the debt service fund were reasonable, the capital reserve was overfunded by approximately $593,000 or 80 percent.

During the 2014-15 fiscal year, the Board outsourced the District's payroll function to the Franklin-Essex-Hamilton Board of Cooperative Educational Services (BOCES). However, the District's procedures for day-to-day payroll processing did not clearly define the respective payroll responsibilities of BOCES and the District. For example, the District relied on BOCES to monitor the provisions of the collective bargaining agreements (CBAs) and employment contracts, with limited oversight from District officials. Due to the complexity of the CBAs and contracts, the BOCES payroll clerk was not always aware of all applicable payroll provisions. As a result, three employees were overpaid by a combined total of $9,630 and one employee was underpaid by $551.

The Board did not adopt realistic budgets based on historical or known trends. The Board underestimated non-property tax revenues and overestimated expenditures, for total budget variances of more than $35 million. The Board-adopted budgets generated operating surpluses totaling more than $20 million over these three years. As a result, the total $14.9 million in appropriated fund balance and reserves was not needed or used to fund operations. District officials also made unbudgeted interfund transfers totaling $38 million from the capital reserves (reported in the general fund) to the capital projects fund and also made unbudgeted transfers to the District's reserves. Along with the budgeted appropriation of fund balance that has not been used, this has reduced reported year-end fund balance to within the 4 percent limit established by the Real Property Tax Law. When the unused appropriated fund balance is added back, the District's recalculated unrestricted fund balance ranged from 5.9 to 6.6 percent of the ensuing year's budget, exceeding the statutory limit in each year. In addition, two of the District's six general fund reserves, which had balances totaling more than $4 million as of June 30, 2015, are overfunded or potentially unnecessary. In addition, while the District's separation payments generally conformed to the terms of the collective bargaining agreements (CBAs), we found that the District paid three retirees $31,603 (5 percent) for payments approved for benefits over what was authorized in the CBAs. We also question payments to six administrators totaling $18,012 (3 percent) for vacation days carried over from the previous year without Superintendent approval, as required by the CBA.

The Board is required to deliver to the Tax Collector a school tax roll together with a warrant authorizing the collection of taxes prior to the start of the collection process. If any taxes remain unpaid at the end of the collection period, the Tax Collector is required to return the school tax roll and warrant to the Board, along with a statement of the unpaid taxes and description of the properties on which the taxes remain unpaid. We tested the 2015-16 tax collection totaling approximately $2.65 million and found that the Board did not provide the Tax Collector with a warrant prior to the start of the tax collection process. However, the Tax Collector received, recorded and provided the taxes collected for deposit in accordance with the District's approved budget and tax worksheet prepared by the Superintendent. We commend District officials for developing procedures to ensure that tax collections are secure.

District officials did not ensure that the cash receipts process for ECA funds were administered in accordance with District guidelines and those of the Commissioner of Education. Bank deposit slips are usually not prepared by the ECA clubs as required by the District's written guidelines. Instead they are prepared by the Central Treasurer who also deposits the funds in the bank. Additionally, the Central Treasurer did not issue pre-numbered duplicate receipts for all funds placed in her custody, funds are not always deposited timely and bank deposit slips are not always prepared by the ECA clubs.

The Trustee and Treasurer ensured that disbursements were for proper District purposes and adequately supported. The Treasurer submitted prepared checks, including supporting documentation, to the Trustee for audit and approval prior to payment. We commend District officials for implementing appropriate cash disbursement procedures.

The Board and District officials did not maintain reasonable fund balance. As of June 30, 2015, the District's unrestricted fund balance totaled over $1.1 million, exceeding the 4 percent statutory limit by 7.3 percentage points. With the inclusion of the unused appropriated fund balance, the fund balance ranged from 12.1 to 14.7 percent of the ensuing year's appropriations. In addition, the District had a reserve fund that was overfunded by $703,000. We found that appropriations have been overestimated by $2 million in total, or an average of 6.9 percent per year, from 2012-13 through 2014-15. District officials were generally overestimating health insurance, contractual special education and certain teachers' salaries instead of relying on historical information. These budgeting practices made it appear that the District needed to both raise taxes and use fund balance to close projected budget gaps. However, there were operating surpluses in two of the three years reviewed. Furthermore, the District increased the tax levy from $7.3 million in 2012-13 to $7.7 million in 2015-16, a total increase of about 4.5 percent or an annual average of 1.5 percent.

District officials are not properly monitoring employee overtime to ensure that the District is incurring only necessary overtime costs. While the District's payroll instructions state that employees must obtain supervisory approval before working overtime hours, the District does not have adequate procedures in place to ensure overtime is preapproved. During our audit period the District paid $470,355 for overtime. Of this total, the District paid $363,482 (77 percent) of the overtime costs to personnel in the Building and Grounds Department (department) and Security office. We randomly selected two bi-weekly November 2014 payrolls in which employees worked 196.75 overtime hours and received overtime payments totaling $8,371. We found that none of the overtime hours worked had been preapproved. For example, one security guard worked 33.5 overtime hours and received overtime payments totaling $1,143 for “video room coverage.” This consisted of monitoring the cameras in the security office that provide surveillance of the school's facilities. Had overtime preapproval been mandated, overtime would have been more closely monitored and shifts may have been rearranged to incorporate video room coverage into employees' regular workdays.

The Board consistently overestimated appropriations in the District's adopted budgets. Although the District reported year-end unrestricted general fund balance at levels that essentially complied with the 4 percent statutory limit, the Board adopted budgets which included appropriated fund balance and reserves that were not needed as funding sources because the Board and District officials overestimated appropriations by an average of 8.8 percent over the last three fiscal years. As a result, the District experiencing an operating surplus in 2011-12 and operating deficits in 2012-13 and 2014-15 that were significantly less than planned. When the unused appropriated fund balance was added back, recalculated unrestricted fund balance averaged about 8 percent of the ensuing year's appropriations, exceeding the legal limit. In addition, the employee benefit accrued liability reserve was overfunded by $1.39 million, which was nearly 40 times the amount of compensated absences reported by the District.

Although the District has procedures specific to the maintenance of IT inventory, the Board has not adopted an asset policy establishing capitalization or tagging thresholds, control over assets, or how to maintain records for these assets. Consequently, three assets valued at $1,650 could not be located and 21 assets valued at $69,370 were either not tagged or the asset tag numbers did not agree with the asset records. Furthermore, 10 assets purchased in 2015-16 valued at $57,573 were not recorded on the asset list and nine assets valued at $45,750 were listed as disposed of, but were still in service. We also found that 18 of 20 assets listed as disposed of, valued at $32,920, did not have documentation indicating authorization or approval. As a result, District officials do not have assurance that all District property is accounted for properly.

District officials have not effectively managed the general fund's fund balance. The District has not correctly recorded and reported the composition of its fund balance. Since the fiscal year ending June 30, 2013, the Treasurer has recorded and reported the amount of unrestricted fund balance that exceeds the statutory limit at the end of each fiscal year as “other restricted fund balance” to keep the unrestricted fund balance within the limit. This accounting practice understates the true amount of the general fund's unrestricted fund balance and circumvents the statutory limit the District is permitted to retain. As a result, over the four past fiscal years, 2011-12 through 2014-15, the District retained unrestricted fund balance amounts that ranged from 15 percent to 34 percent of the ensuing year's appropriations. In addition, the District appropriated fund balance that was not used and funded the capital reserve with no established plans. These actions also helped to keep the unrestricted fund balance within the statutory limit.

The Board and District officials need to improve the budget process to ensure they effectively manage the District's financial condition. During the last three completed fiscal years (2012-13 through 2014-15), the Board and District officials overestimated general fund appropriations by $7.3 million (9 percent) resulting in combined operating surpluses totaling $6.4 million. District officials used the operating surpluses to make interfund transfers totaling approximately $4 million and increase reserves by $1.6 million. As a result, four reserves with balances totaling $2.9 million (48 percent of total reserves) are overfunded and potentially unnecessary. In addition, $570,000 in appropriated fund balance was not needed to finance operations and compensated absences and accrued liabilities were overstated by $275,930 as of June 30, 2015. We also believe that the $285,000 appropriated fund balance for 2015-16 will not be used. These practices allowed the District to report year-end unrestricted fund balance at levels that essentially complied with the statutory 4 percent fund balance limit. However, when adding back the unused appropriated fund balance, overstated liabilities and overfunded reserves, the District's recalculated unrestricted fund balance ranged between 16 to 18 percent of the ensuing year's appropriations, significantly exceeding the statutory limit. As a result, the District's tax levy was higher than necessary to fund District operations. In addition, the District's school lunch fund balance exceeded Federal regulations by almost $360,000. Lastly, the Board and District officials have not developed a formal written multiyear financial plan. As a result, officials may not be aware of future needs and available revenue streams while working on strategic planning.

Over the five-year period ending June 30, 2015, the Board and District officials have adopted budgets that reduced unrestricted fund balance to within the 4 percent statutory limit of the ensuing year's appropriations. However, each year in the period, District officials appropriated more fund balance than needed, which artificially lowered the percentage. Instead of having operating deficits totaling $2.8 million for the period, as planned, the District's net result of operations was a surplus of $705,000. In addition, District officials overfunded five of the six reserves as of June 30, 2015. Moreover, District officials did not use debt service funds to make payments on long-term debt. This fund's balance ranged from $1.3 to $1.8 million for the five-year period. With the inclusion of the unused appropriated fund balance, the overfunded reserves and the unused debt service funds, the fund balance for the five years ranged from 26.7 percent to 29.4 percent of the ensuing year's appropriations. Appropriating fund balance that is not needed and the lack of a formal plan for the use of reserves, including optimal or targeted funding levels and the justification for them, has resulted in the tax levy appearing to be higher than necessary.

The District has accumulated unrestricted fund balance that exceeds the statutory limit by approximately $977,000 (nearly 12 percentage points) and has levied more taxes than were needed to fund operations during the 2013-14 through 2015-16 fiscal years. The Board also overestimated appropriations in the 2012-13 through 2014-15 budgets by more than $2.3 million (10 percent). In addition, the District's budgeting practices made it appear that the District needed to both raise taxes and appropriate fund balance and reserves to close projected budget gaps. However, it realized an operating surplus of $51,390 during the 2012-13 fiscal year and smaller-than-planned operating deficits of $24,169 in 2013-14 and $39,578 in 2014-15. As a result, the District used less than 3 percent of the total appropriated fund balance and reserves during those three years, and the District's unrestricted fund balance increased rather than decreased at the end of each year. The District continued the same budgetary practices when preparing the budget for the 2015-16 fiscal year, which will likely result in similar actual results of operations as the last three fiscal years.

Although the Board has developed a purchasing policy and District officials have developed corresponding regulations, they do not provide guidance for seeking competition when procuring professional services. The policy and regulations do not indicate when, or at what monetary threshold, it is appropriate to use written RFPs, written quotes or verbal quotes. Additionally, the policy and regulations do not outline the specific documentation requirements to be used during the solicitation process, including documentation for the decisions made. In discussion with District officials, we found that there are also no informal guidelines to ensure competition is sought for professional services. Further, the District did not have formal written agreements with four of the professional service providers that were paid more than $5,000.

The District has overestimated appropriations in the adopted budgets by about an average of 14 percent annually over the past three years. As a result, a significant portion of the fund balance appropriated in the general fund was not needed to finance operations and unassigned fund balance has exceeded the 4 percent legal limit each of the last three fiscal years. The District has reduced the reported level of year-end unassigned fund balance from 9.3 percent of the ensuing year's budget at the end of 2012-13 to 6.9 percent at the end of 2014-15, but when the unused appropriated fund balance is added back, the recalculated unassigned fund balance exceeds 20 percent of the next year's appropriations for each of the three years. In addition, the District's tax certiorari reserve is overfunded by approximately $567,000 and, based on historic costs, the unemployment insurance reserve has enough funds to cover 37 years of expenditures.

The District's unassigned fund balance has exceeded the 4 percent legal limit from fiscal years 2012-13 through 2014-15. At the end of 2014-15, the District's fund balance was approximately $2.4 million, or 9.7 percent of the ensuing year's appropriations. This amount exceeds the limit by 5.7 percentage points, or about $1.4 million. Although the District's unassigned fund balance has exceeded the statutory limit for the past three fiscal years, the Board increased the tax levy from $7.8 million in 2012-13 to $8.3 million in 2015-16, an increase of about 6 percent. Finally, the Board has not adopted a multiyear capital or operational plan for the use of surplus fund balance.

The Board has consistently overestimated appropriations in its adopted budgets by about 9 percent over the past three years. As a result, a significant portion of the fund balance appropriated in the general fund was not needed to finance operations and unassigned fund balance has exceeded the 4 percent legal limit from fiscal years 2012-13 through 2014-15. The District has reduced the reported level of year-end unassigned fund balance from 12 percent of the ensuing year's budget at the end of 2012-13 to 8.6 percent at the end of 2014-15. However, when the unused appropriated fund balance was added back, the recalculated unassigned fund balance exceeded 15 percent of the next year's appropriations in all three years.