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Pennsylvania Department of the
Auditor General
Eugene A. DePasquale
Bureau of School Audits
Financial Challenges :
What have our audits revealed
about school districts’ financial
struggles?
PASBO 2015
March 12, 2015
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Department of the Auditor General’s
Statutory Authority
• The Constitution of Pennsylvania and the Fiscal
Code provide the broad authority and duty of the
Department to conduct audits of the
Commonwealth’s public school entities.
• Inherent in this broad authority and duty to
conduct audits it is necessary to ascertain that the
funding received by publicly funded schools has/is
being expended for lawful and intended purposes.
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Auditor General DePasquale’s Goals
• To focus on whether children are being
educated.
• To focus on whether the schools are financially
stable.
• To focus on whether schools are safe.
• To focus on identifying those schools that need
the most help.
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Act 141 of 2012
• Implemented by the PA Board of Education Developed criteria to gauge a district’s status.
• Financial Watch List - Gives the district access to
additional technical assistance from the
Pennsylvania Department of Education (PDE).
• Financial Recovery Status - PDE makes the
determination, district receives PDE appointed chief
recovery officer who oversees the district and the
development of a district-wide financial recovery
plan.
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Public School Code
• Districts cannot increase property taxes if their
unassigned fund balance exceeds 8% to 12% of
their expenditures.
• The smaller the expenditures the larger the fund
balance can be.
• Districts cannot raise taxes get waivers for
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Focus of Our Financial Audit Objective
• Assessing financial stability before a district goes
onto financial recovery/financial watch.
• Examining trends that can suggest whether the
district’s performance is moving in a positive or a
negative direction.
• Providing the district with benchmarks that it
should continually monitor.
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Source of Criteria
PASBO
Other States - Colorado
National Forum on Educational Statistics
PA Board of Education
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Benchmarks Reviewed
Level of the general
fund – fund balance
(assigned and
unassigned).
Amount of total
debt service
Current ratio
(current assets ÷
current liabilities)
of all governmental
funds
Quick ratio (cash +
investments) ÷
(current liabilities)
Trend of annual
changes in financial
position for all
governmental funds
Percentage of total
expenditures to
charter schools
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Challenging Financial Environment
1. Reductions in local funding because of the
recession.
2. More difficult to raise taxes.
3. Overall reductions in state funding.
4. Pension costs skyrocketing.
5. Charter school tuition increases.
Common Reactions
• Closing school buildings.
• Spending down fund balances.*
• Requesting a tax waiver to cover pension costs,
which allows taxes to be raised for that purpose.
• Moving unassigned fund balance to assigned fund
balance in order to cover pension costs.
• Refinancing debt.
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Geographic Similarities
• These challenges are effecting both rural and urban
school districts. By in large we have not seen as
many financial problems in the suburbs.
• Urban Areas:
▫ Weak tax base.
▫ Inability to grow through new buildings or
reassessments.
▫ After a certain level, tax collections actually drop
when rates are increased.
Geographic Similarities
• Rural Areas:
▫ Less opportunity for vertical integration in order to
reduce costs.
▫ Staff must fill multiple administrative roles, creating
fewer checks and balances.
▫ Enrollments dropping, but some costs still high, such
as transportation.
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Other Trends
• Citizens increasingly questioning travel
reimbursements and credit card use.
• More incidents of fraud.
• Increased internal and external lawsuits,
resulting in higher legal costs.
• More instances of over expending the budget
and/or making unrealistic budget assumptions.
Case Example: Increasing Lawsuits
• The bureau encountered a school district where
a lame duck board entered into an agreement
with the district’s teachers union.
• The new board felt that the agreement was
financially unsustainable and tried to reopen it.
• The teacher’s union sued the board saying they
did not have the power to reopen the agreement.
• The judge sided with the teacher’s union.
• The board is appealing the judge’s decision.
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Case Example: Old Agreements
• The bureau encountered a school district that
had been collecting taxes for a local library for
decades.
• This was not a problem until local tax rates
plummeted.
• The district ended up making up the difference
between the tax collections and what it had
agreed to pay the library.
Case Example: Extra Revenue
• The bureau encountered a school district that
leased a mine on its property.
• It then entered into a series of bonds, thinking it
could use the revenue from the mine to pay-off
the debt.
• The mine ran out and now the district cannot
pay off the bonds.
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Districts Should Keep In Mind
• Board members should have the information they
need to make good financial decisions, such as:
▫ Comparison of budgeted revenues and expenditures
to actual revenues and expenditures (monthly).
▫ Cash flow statements.
▫ A list of payments to approve.
▫ A list of unexpected (unbudgeted) revenues.
• Districts should consider maintaining a year-round
budgeting process.
Districts Should Keep In Mind
• Boards may want to consider establishing a
finance committee.
• Districts should assess their contract monitoring
process.
▫ Even if a contract does not have to be bid, districts
should do something to ensure they are getting a
reasonable price and a quality good or service.
▫ The contract monitoring process should be written
down.
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District’s Should Keep In Mind
• Consider adopting a policy that establishes a
minimum fund balance (unassigned + assigned).
It should be at least 3 % of total expenditures.
• Establish strong internal control procedures to
ensure operational checks and balances. COSO
is a good place to start.
• Consider adopting policies for travel
reimbursements that require receipts to be
provided and expenses approved before
reimbursement is made.
Districts Should Keep In Mind
• Credit cards can be useful, but it is not always a
good idea to use them to fund normal
operations.
• If you use credit cards, ask that employees sign a
user agreement.
• Try to have a dialogue with citizens about the
district’s financial challenges.
• Try to achieve as much transparency as possible
when making difficult financial decisions.
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Questions
Danielle Mariano
Director of the Bureau of
School Audits
717-787-2323
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