Program Review Committee Response to SDE's Comments

Recommendation #1

Contrary to the department's assertion, the committee considered four governance options for regional schools (presented in Table VI-1 on page 40). These options ranged from maintaining the current structure to statutorily mandating regional boards of finance be established to oversee the regional school district's budget approval process. After discussion and deliberation of each of the options, the committee voted to raise enabling legislation that would give voters in towns belonging to regional school districts the authority to establish regional finance boards if a region-wide majority of voters approved such action.

The committee's decision to recommend enabling legislation be adopted was based primarily on:

Ultimately, the committee decided that the most appropriate body to determine if regional finance boards should be established were voters belonging to regional districts. In addition, voters still would be responsible for approving regional school budgets, after review and approval by the regional finance board. Thus, the "purest form of oversight" remains intact.

Furthermore, the committee would like to emphasize that Regional School District No. 5 was not the central focus of this study, but was used to demonstrate the limitations of the current structure. The report clearly states:

The question of whether the regional school district structure ensures an appropriate level of accountability exists can be examined using Regional School District No. 5 as a case study. After experiencing a $2.8 million deficit in FY 01 and FY 02, which was not revealed until August 2001, allegations of finance mismanagement and inadequate fiscal oversight by the regional school board has caused serious credibility problems with voters over the last 18 months... These problems illustrate the inherent weaknesses built into the current structure and need to be weighed against arguments opposing change, citing this district as an anomaly (p.40).

Finally, the Region No. 5 "advisory committee" composed of the tri-town boards of finance is in fact approving monthly expenditures for the district. However, there is no clear legal authority to do this and members of the tri-town committee have expressed unease about operating in such legal ambiguity.

Recommendation #3

Although only two of the 14 regional school boards chairs responding to the program review committee's survey on Regional School District Governance reported that the district had run a deficit within the last five years (See Appendix C, page C-6), the committee believes that allowing regional school districts to have unlimited statutory authority to deficit spend is excessive. However, the committee agrees with the department that some spending discretion is necessary, precisely for the reasons noted (i.e., managing the cash flow requirements of the districts that could result from late tuition payments or grant receipts). Thus, the committee did not entirely prohibit deficit spending, (as it is for all other school boards without first obtaining approval from the local fiscal authority), but capped it at a percent of total regional school budget appropriations.

Recommendation #4

The department is correct in stating that boards of education are only required to announce line item transfers at the next regularly scheduled meeting when emergency transfers are made by designated personnel. However, the committee strongly believes fuller public disclosure of line item transfers strengthens accountability by providing voters with a comparative record of initial budget priorities and budget revisions during the budget year. Finally, the committee did not extend this recommendation to all school boards because it was outside the scope of study.

Miscellaneous Corrections

Bullet 1: The committee clearly notes that representation on regional school boards is based on town population. However, the statement below merely discusses reasons why acrimony may exist among towns in regions with similar student populations. Thus, the committee disagrees with the department's characterization that it is an "incorrect combination of concepts [that] perpetuates misunderstanding of the operation of a regional school district."

A key factor in determining the voting power of the individual towns in a regional district is the state law, based on federal constitutional principles, that board representation be based on population. In interviews conducted by program review committee staff, some municipal officials belonging to smaller towns in regional districts expressed frustration at their town's lack of voice in board matters because the voting weight of the larger town can dominate board decisions. This belief is exacerbated when different views exist among towns on educational funding goals, especially those related to capital expenditures and school budget increases. Although such differences occur among board members in single town school systems, the factious nature of the disputes can divide a regional district along town lines. As a result, if a budget vote is along town lines, the larger town can pass the budget, even if the smaller town votes against it.

Another source of dissatisfaction with regional governance is in regions with similar student populations. While a town's share of education costs is based on its number of students, voting power is related to its share of the region's total population. So, less populous towns with a comparable number of students to populous towns in the same region pay the same amount but have less voting power.

Bullet 2: Although C.G.S. Sec. 10-51 (a) provides for any year-end surplus in regional school districts to be stated in the succeeding proposed budget, C.G.S. Sec. 10-51 (c) requires that "any budget appropriation which has not been expended by the end of the fiscal year [be used] to reduce the net expenses of the district for the following year." Thus, a surplus may exist in a regional school district at the end of the fiscal year, but it must be used toward next year's expenses. There is no legal authority to retain a surplus account. As stated in the report, the committee maintains that a surplus cannot be carried by a regional school district. This conclusion is also supported in the authoritative and highly respected publication A Practical Guide to Connecticut School Law (Thomas B. Mooney, Second Edition (2000)). Mooney states, "[t]here is no general authority for regional school districts to hold a surplus."

Bullet 3. The committee concurs there is a high level of frustration being expressed by Amity voters unrelated to the proposed budget. However, it is a result of voter mistrust of the regional school board because of fiscal mismanagement by the board. The State Department of Education claims the committee does not have a proper understanding of the facts. While additional issues may indeed be uncovered, the committee is well aware of what is already on the record. In fact, the Board of Education's own Office of Internal Auditor has found the district's board and management were made aware of the district's deficient financial reporting system as early as November 2000. The district did not begin to respond until a year later, when the $2.8 million deficit came to light. Because of the district's inaction, the state board's auditor concluded "certainly some level of neglect to take corrective action in a timely manner is evident." Without a doubt, a contributory factor to the continued rejection of the proposed budget is a response to the inadequate fiscal oversight exercised by the entire regional board. While recognizing that Amity represents one end of a spectrum, the committee believes the events in the district illustrate a basic structural problem inherent in all regional school districts that inhibits a greater degree of fiscal accountability. The committee would not want to experience any more Amity-like horrors and therefore endorses a modest voter-initiated optional reform proposal aimed at strengthening fiscal accountability.

Bullet 4: If a local school board must first obtain approval from their local board of finance prior to exceeding appropriations, in the opinion of the committee, the statute prohibits deficit spending.

State Oversight

After a number of disclosures by the Amity board about the district's finances were revealed and an independent audit had been issued in November 2001, the first selectmen of the tri-town area had come to the State Department of Education seeking assistance to investigate the fiscal problems in Amity. For SBE to suggest that an investigation conducted by an ad hoc, multi-town committee without any legal authority or expertise is adequate and the best alternative, suggests a lax approach to a very serious fiscal matter on the part of the SBE.

The committee primarily focused on the role of the Office of Internal Audit (OIA), not the commissioner of SDE, in examining the response of the State Board of Education, given its responsibilities under the State and Federal Single Audit Acts and school construction audits. The head of the unit is appointed by and reports to the State Board of Education. When committee staff conducted initial interviews in May 2002, the auditor was unaware of previous reports issued regarding Amity's poor financial fiscal management practices. As the committee's report explains in greater detail, the state's internal auditor was not prompted to become involved in the Amity investigation until SBE received a letter in June 2002 from Woodbridge Board of Finance members alleging 250 violations of state law by the Amity regional board - after an independent audit was released showing a deficit and other findings, after the tri-town report was published alleging more issues of fiscal mismanagement, and after town leaders had asked for assistance. This was almost a full year after the deficit was discovered. In addition, the committee faults the auditor for not scrutinizing the work of Amity's auditor, as OIA is permitted to do under law, when it became apparent that the fiscal management problems, previously undetected by the same independent auditors, stretched well before the last fiscal year.

The state's attorney did not conduct a separate investigation but relied on a review of the tri-town report. Given the severe limitations placed on the tri-town committee, their report (which is not a forensic audit) would not generate the type of evidence that would normally trigger criminal investigation by the state's attorney. While both the state's attorney and the attorney general can become involved in controversies in a number of ways, practically speaking they would, in this case, rely on SBE to do some investigatory work. Indeed, the attorney general did not initiate his own investigation in Amity but responded to referrals by SBE.

The need for SBE involvement is borne out by the results of the state board's own initial (and thus far only), limited review in July 2002. The SBE auditor found neglect on the part of the regional board to take actions in a timely manner to avoid a deficit, deficiencies with the budgetary process, including misleading statements by the board's budget committee and finance director, illegal loans, and violations of the tax code. SBE is still investigating additional allegations, but has not yet issued any findings.

Recommendation #7

As stated in the report, the committee concurs that quality control reviews of independent auditors should be done.

Recommendation #8

An adequate tracking system would assure timely follow-up and resolution of audit findings and include more aggressive follow-up for serious findings. While SBE may establish deadlines, our review of regional district audit findings for a three-year period found 11 districts had multiple years of the same findings obviously exceeding SBE imposed deadlines. In addition, SBE follows the same process for all audit findings, including the most serious.

Recommendation #11

As stated in the report, the committee concurs the independent auditor should not be selected by or report to regional administrators. The State Board of Education already has significant involvement in developing requirements for, reviewing the adequacy of, and in the case of construction audits, performing audits for regional school districts. Current practices of having regional school administrators select independent auditors are contrary to effective oversight and may compromise the integrity of the public finance function. Given the current level of participation by SBE in regional school audits, it is not unrealistic or impractical to have SBE involved in the selection of independent auditors.