Chapter Six

Findings and Recommendations

Introduction. The Legislative Program Review and Investigations Committee identified three major areas in its review of Regional School District Governance. A brief overview of the central issues identified by the committee along with findings and recommendations are provided below. More detailed analysis is included in the appendices. The three areas are:

• fiscal and budgetary oversight of the regional school boards;
• statutory process to withdraw from or dissolve a regional school district; and
• statutory formula mandating local share of education costs.

Overall, the program review committee offers recommendations aimed at strengthening local and state level accountability mechanisms, standardizing practices for the payment of regional school budget referenda, and providing consistent processes among towns wishing to partially withdraw from regional school districts. The committee does not recommend any change in the current statutory formula that assigns local share of education costs.

Finding - Governance Structure

The regional school district governance structure gives regional school boards much greater autonomy over the budget process than local boards of education. A regional school district budget is presented directly to the voters in towns belonging to regional school districts for adoption. Thus, voters in these towns provide the only level of scrutiny over budgetary decisions made by regional school board members.

Background - There are significant differences in the authority of regional school district boards when compared to local school boards. A local board of education presents its budget to the local fiscal authority for review and approval for inclusion in the municipal budget prior to its adoption. The municipality's fiscal authority can reduce the overall amount of the education budget, though they cannot specify which items to cut. In regional school districts, however, local fiscal authorities have no oversight role in any regional board decisions. Rather, regional board members are directly accountable to voters in member towns. Once a regional school district's budget is adopted, either through the district's annual meeting or by referenda, town officials' role is limited to collecting the revenues to operate the schools and passing though those funds to the district.

Issue - At the heart of the debate is whether the budget process under the regional school district governance structure allows for sufficient fiscal public accountability, and if not, how closely it should mirror that of local school boards. Opponents of changing the current structure and establishing a regional finance board with budget approval authority maintain that:

• regional school board members are elected by and directly accountable to voters. Thus, if voters dislike the decisions made by board members, they can use the power of the ballot to affect change;
• given the multi-town nature of regional schools, creating another layer of bureaucracy would be too cumbersome and inefficient;
• it would upset the delicate relationship among towns that currently exists - voters in towns freely created these districts and if change is called for, it should be a local, not state, initiative;
• it is already difficult to get individuals to run for unpaid elected offices given the time commitment involved -- changing the structure would make it more difficult; and
• it would separate education policy-making and administration from financing decisions, which could impede meeting education goals.

Proponents of changing the current governance structure present several arguments for creating a stronger role for local fiscal authorities. These include:

• regional board of education members have a dual and sometimes conflicting role (i.e., advocate for highest quality education yet exercise fiscal prudence);
• regional board members are not required to consider towns' financial conditions, whereas this is one of the responsibilities of boards of finance;
• district voters approve or reject a regional education budget at the end of the budget process after all of the work is completed; a finance board would have input and/or authority earlier on in the process;
• education expenditures comprise a large part of towns' budgets and towns' levy taxes, but town officials in regional school districts have no formal role in the budget process⁶; and
• voter turnout is often low and therefore, not enough budget scrutiny may occur.

The program review committee surveyed all regional school board chairpersons, and board of finance chairpersons and first selectmen in towns with regional schools. (See Appendix C for survey methodology, response rates, and complete results). One survey question asked if regional boards of finance should be established and the responses summaries follow.

• Almost 80 percent of regional board chairs responded no; 14 percent yes; and 7 percent had no response. Of the 2 chairs that responded yes, both thought the role of a regional finance board should be advisory (N=14).
• Two-thirds of first selectmen responded yes; 29 percent no; and 5 percent were unsure. Of the 27 selectmen responding yes, 22 respondents believed a regional finance board should have budget-approval authority (N=41).
• And almost two-thirds of finance board chairs responded yes, 32 percent no, and 3 percent were unsure. Of the 21 finance board chairs that responded yes, 20 thought a regional finance board should have budget-approval authority (N=34).

Cause - State law establishes a separate budget approval process for regional schools. In addition, the statutes do not require any formal points of contact between regional boards of education and local fiscal authorities, beyond mandating members towns pass education revenues to the regional district. Enabling legislation giving towns authority to establish regional school districts, creating a formal role for local officials within the regional school district governance structure, has not been the focus of subsequent legislation.

Effect - Regional school boards have much greater discretion over education budgets than local boards of education. In the absence of regional boards of finance to approve regional school budgets, no consideration of member towns' financial needs or long-term planning goals are required to be part of the budget process. Furthermore, regional school budgets are presented and voted the first week of May, prior to town budgets. Once voters approve the regional school budget, each town's share is incorporated into each town's budget. However, if voters reject the town budget, local finance boards can reduce only town services, since the regional school budget was previously adopted.

Furthermore, without laws providing for local official input, the amount of communication among town officials and regional board members depends on informal relationships and varies by district. For example, according to interviews conducted by committee staff, one district has little communication, while another invites the local finance board chairs and first selectmen to participate on a Regional Board of Education Finance Committee in an advisory role.

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 financial mismanagement and inadequate fiscal oversight by the regional school board has caused serious credibility problems with voters over the last 18 months.⁷ To date, ten budget referenda have been held and voters in the three member towns have called for a number of board members to resign. In addition, since the budget deficit was uncovered, the chairpersons of the three towns' finance boards have been approving the district's monthly expenditures. 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. (For a synopsis on reports and investigations regarding Amity School District see Appendix D.)

Remedy - Whether to maintain the current regional school district governance structure or shift budget approval power to a regional finance board is a policy choice for lawmakers to resolve. To assist in this decision, Table VI-1 shows four models along a continuum that progressively decrease regional boards of education autonomy, by increasing the role of local fiscal authorities in member towns. The first option keeps the current structure leaving approval of regional school budgets to district voters, while the second and third options provide for a greater role for local officials, but no budget approval authority. Rather, both of these options formalize lines of communication between the member towns and the regional school board. The last option would establish regional finance boards with budget authority similar to the powers that local finance boards currently have over local boards of education.

If lawmakers select the last policy option, the regional finance boards could either be mandated or voters in towns belonging to regional school districts could decide if a regional finance board should be established, much like the currently statutory authority given to town voters to create local boards of finance. Furthermore, rather than separately electing regional finance board members, the chairpersons and other elected members from existing local boards of finance could sit on the regional finance board. Voting power and representation of member towns on a regional finance board, like regional school boards, would have to be based on each town's population and in accordance with federal constitutional standards.

RECOMMENDATION

After discussion and consideration of each proposed policy option, the committee recommended towns be given the statutorily authority to establish regional finance boards after a region-wide majority vote of approval (i.e., policy option No. 4-B in Table VI-1). Specifically, the committee recommended:

Enabling legislation be adopted granting voters in towns belonging to regional school districts the statutory authority to establish regional finance boards by a region-wide majority vote. Members of regional finance boards would be appointed from local Boards of Finance to oversee the regional school district budget approval process.

Findings - Strengthening Regional School Board Accountability

• It is unclear in statute how towns in regional school districts without adopted budgets as of July 1, should fund those districts.
• Unlike local schools boards, regional school boards have authority to deficit spend and there is no requirement for voter approval prior to the board exceeding its appropriations.
• C.G.S. Sec. 7-398 requires reports concerning public finances or the reception or disbursement of public funds made by selectmen or treasurers of towns be verified by oath. Any person who verifies any return, known to be false, or which in any material respect intentionally suppresses or conceals the truth, is subject to the penalty for false statement. There is no such requirement for regional school district treasurers.
• All school boards can transfer funds among budgetary line items. However, no detailed information on line-item transfers need be provided by school boards for the public record, only that such transfers be announced at board meetings.

Background - C.G.S. Sec. 7-405 requires municipalities that have not passed a budget by the beginning of the fiscal year (July 1) to receive authorization for necessary expenditures for the first 90 days from the town's budget-making authority. If a budget still has not passed, expenditures are limited on a monthly basis to appropriations made the previous fiscal year. Although this statute is being used as a guide by towns in regional school districts without budgets as of July 1, it is not clear if it is applicable to regional school districts.

In addition, local school boards cannot deficit spend without first obtaining approval from the local fiscal authority. Conversely, regional school boards are not prohibited from deficit spending, and do not have to obtain voter approval prior to exceeding their appropriation. Furthermore, Connecticut law requires municipal treasurers and boards of selectmen verify the accuracy of financial reports and transactions by oath, but there is no such requirement for regional school board treasurers.

Finally, all boards of education have discretionary power in expending their appropriation. This gives boards the authority to transfer funds from one account to another. Line item transfers allow boards to readjust priorities or reconcile accounts during the school year. However, the statute does not require reasons for line item transfers or the impact of such transfers on individual line item accounts be part of the public record.

Issues - Regional school budgets that are approved by voters establish priorities by explaining where resources will be directed and what the board expects to accomplish. If no budget is approved or appropriations are exceeded, voter consent is absent. Additionally, although regional school boards must review and approve district expenditures and payments, regional school board treasurers do not have to verify accuracy by oath, as do municipal treasurers.

Cause - The committee identified several areas where either the discretion given to regional school boards differ from local school boards, or public accountability is weak. Connecticut statutes provide more direction to municipalities than to regional school boards in two key areas: the amount of allowable municipal expenditures (including expenditures for local schools) if there is no approved budget by the new fiscal year, and a process that local boards of education must follow before exceeding appropriations. State law also holds certain elected officials accountable by requiring returns concerning finances to be verified by oath and imposing a penalty for false statements.

Effect - If voters do not approve regional school budgets by the beginning of a new fiscal year, or boards deficit spend, voters in regional school districts have no voice in spending decisions. Without a process to approve deficit spending, voters ultimately become responsible for a district's actions, even though it had no control over them. Transferring funds among line items can also revise budget priorities and voters should be made aware of changes made to budgetary lines that were approved.

Remedy - To strengthen regional school district reporting requirements, ensure public accountability, and extend various statutes to regional school boards. Establish greater controls over regional school districts budgets by:

• extending certain state statutes governing local school boards to regional school boards; and
• strengthening public accountability by requiring:
• information about line item transfers be part of the public record;
• regional school district treasurers take oath verifying public financial information.

RECOMMENDATIONS

• Towns shall fund regional school districts, at a minimum, at the previous years' appropriations if regional school budgets are not adopted by the beginning of the fiscal year until the regional school budget is passed.
• Regional boards of education shall be prohibited from deficit spending in excess of one-quarter of one percent of their total budget unless approved by a region-wide majority of voters in member towns.
• Each regional school board shall report, as part of the public record, a detailed written statement for each transfer of funds among line items. The statement shall include:

_ the reason for the transfer;

_ an identification of the line item account and the dollar amount that funds are being transferred from and to;

_ the intended use of the funds if the transfer is approved; and

_ the fiscal impact on the line item account that funds are being transferred from.

• At the end of each fiscal year, the board shall summarize the number and types of fiscal transfers made, the aggregate amount transferred to and from each account, and the impact of such transfers.
• Regional Board of Education treasurers shall verify by oath public reports, returns, and reception or disbursement of funds. Any person who verifies any return or report, known to them to be false, in fact, or which in any material respect intentionally suppresses or conceals the truth, shall be subject to the penalty provided for false statement.

Finding - Withdrawal of Grades

Current law does not allow a town that is a member of a K-12 regional school district to withdraw only some grades from the districts.

Background - C.G.S. Sec. 10-47b sets out a process for adding or withdrawing grades from a regional school district, but allows it to be used only by regional boards that do not include all elementary and secondary school grades. The process requires a study, SDE approval, and simultaneous referenda before the change can be implemented. Conversely, K-12 regional school districts that want to withdraw only certain grades must go through the dissolution process and then, re-establish the district with only those grades.

Issue - The law sets out a process for adding or withdrawing grades from a regional school district but allows it to be used only by regional boards of education in school districts that do not include all elementary and secondary school grades. K-12 regional school districts must first dissolve, then reconstitute the regional school district, if they want to remove some grades from the district.

Cause - The law does not provide an expedited process for K-12 regional school districts to withdraw grades.

Effect - The only option for a town in a K-12 district that wishes to withdraw from the district in order to have its own elementary school while retaining the regional middle and secondary grades is to dissolve the district. Once the district is dissolved, it must be reconstituted to include only the specific grades.

Remedy - The expedited process for withdrawing certain grades should be extended to K-12 regional school districts.

RECOMMENDATION

C.G.S. Sec. 10-47b shall be amended to include K-12 regional school districts.

Findings - State Oversight

State oversight mechanisms have been unused and need to be strengthened

Background - Regional school districts are subject to three types of audits.

• Annual Audit - the annual audit is comprised of the following elements.

_ Audit of Combined General Purpose Financial Statements - required by state law under the Municipal Auditing Act (C.G.S. Sections 7-391 through 7-397). It requires each town and regional school district to undergo an annual audit by an independent auditor who submits the report to the secretary of the Office of Policy and Management (OPM). If, in reviewing this audit, the secretary finds evidence of "unsound or irregular financial practice in relation to commonly accepted standards in municipal finance," he refers the matter to the Municipal Finance Advisory Commission (MFAC) (C.G.S. Secs. 7-394 to 395).

_ State Single Audit - required for any organization that expends state financial assistance equal to or in excess of $100,000 in any fiscal year (C.G.S. Sections 4-230 through 4-236).

_ Federal Single Audit - required for any organization that expends $300,000 or more annually in federal funding.

• State Construction Audit - required by state law before final payment of any state construction grant is made.
• Grant Data Audit - certain grant data, including student counts, must be audited in all school districts annually, per C.G.S. Section 10-227.

While the Office of Policy and Management was the agency responsible for ensuring the requirements for two components of the Annual Audit are met (State Single Audit and the audit of the combined financial statements), OPM transferred the responsibility for the State Single Audit in 1992 with regard to regional school districts to the State Board of Education (SBE). The state board's Office of Internal Audit (OIA) is the unit responsible for performing this oversight function along with conducting construction and grant data audits.

Issues - In reviewing the process used by SBE and OPM to oversee the audit function, the program review committee identified the following findings.

1. SBE was slow to investigate fiscal problems in the Amity School District (Regional District Number 5). The State Board of Education is responsible for the general supervision and administration of the state's educational interests. This includes ensuring school districts are fiscally accountable. However, when the $1.2 million deficit was discovered in the Amity district in August 2001 and a number of questionable accounting practices were brought to light, SBE did not become involved or investigate the causes promptly.

As a result of continuing problems in the district the first selectmen of the three member towns asked the education commissioner to assist in an investigation in November 2001. However, after discussions with the commissioner, it was concluded the towns would investigate the district's problems. The tri-town committee, whose members were appointed by the selectmen, issued a report in March 2002, alleging financial mismanagement. The allegations included violations of tax laws, lack of fiscal oversight exercised by the regional board, and a "fundamental breakdown in the district's purchasing, accounting, and budget monitoring controls." In response to this report, the commissioner asked the Connecticut Association of Business Officials (CASBO) to assist the district but limited their involvement to identifying strategies to stay within their FY 02 budget and developing a schedule to implement improved financial controls. The internal auditor for SBE, the office responsible for overseeing financial integrity, still did not respond. (See Appendix D for a description of recent reports issued regarding Amity and Appendix E regarding recall of regional school board members).

In May 2002, two members of the Woodbridge Board of Finance sent a letter to the SBE internal auditor alleging over 250 violations of state law related to the fiscal management of the Amity school district and asked SBE to conduct an investigation. After performing a review (not an audit), the State Board of Education's internal auditor issued an initial response to the allegations 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. To date, additional allegations are still being investigated by SBE.

The problems experienced in Amity appear to be atypical, and given the size of the deficit and the seriousness of the allegations made, once these concerns were brought to the attention of SDE, a state level response should have been initiated. While SBE may be a reluctant participant in exercising this type of fiscal oversight, in the opinion of the committee, the state board's internal auditor would have been the proper office to launch an investigation. The willingness of SBE to be proactive is especially important, given the jurisdiction of the following public oversight entities.

_ Regional school board. The regional school board is and should be the primary fiscal oversight body. It should define key areas of authority and responsibility, and create appropriate reporting and monitoring procedures. However, when such sweeping accusations of a lack of accountability is alleged, as it has been in the reports issued thus far, involving many of the board members, the board itself lacks the credibility and perhaps the will to do an investigation.

_ Local town officials. A central problem with the tri-town committee investigation, as important and useful as it was, is the towns lack the authority to investigate the regional school district. It depended on the cooperation of the regional board, whose members' actions were being investigated. Unlike local school districts, regional school districts are not accountable to a local finance authority, such as a town council or board of finance.

_ Attorney General and State's Attorney. Both of these offices rely on an investigation by SBE to trigger their involvement as the state's attorney does not have investigatory subpoena power and the attorney general responds to referrals from state agencies. The Office of the Attorney General continues to work with SBE on a number of concerns with respect to the fiscal administration of the district. The attorney general has stated that criminal wrongdoing could not thus far be ruled out. The state's attorney (in July 2002) after reviewing the tri-town report and an operational review completed in November 2000, found no evidence of criminal violations. Those reports, though, were not detailed forensic audits and none has been suggested.

Cause - SBE has not been vigorous, much less proactive in investigating allegations of fiscal mismanagement in Amity.

Effect - The ability of responsible officials to act in a timely manner is compromised and the credibility of all regional board members is diminished.

2. No quality control is being exercised over independent auditors, even when questionable audit work can be suspected. The OIA and OPM have the authority to perform quality control reviews of selected audits made by independent auditors that are prepared pursuant to the State Single Audit Act. Quality control reviews verify appropriate procedures have been used and professional standards have been met in the conduct of an independent audit.

Regulations governing the State Single Audit provide for the referral of cases of repetitive substandard performance, on the part of the auditor, to appropriate state and professional bodies for disciplinary action. Neither OIA nor OPM perform quality control reviews.

One example where this accountability measure could have been useful is in Regional School District Number 5. Until this year, the Amity district contracted with the same audit firm for more than 10 years. The FY 01 audit reported three deficiencies in the district's budgetary process and accounting procedures. One of those findings, involving a $1.2 million deficit, was considered a material weakness. For at least the three previous annual audits, the auditor reported no findings, even though in November 2000 an independent consulting firm conducted a comprehensive operational review of the district and found several deficiencies in the district's financial management system. Based on the findings of the independent consultant's report, it is reasonable to assume that the weaknesses in Amity's financial system existed before the FY 01 audit, that management was aware of them, and the audit firm probably should have detected them. At the very least, this audit firm should have been a prime candidate for a quality control review by OIA or OPM.

Cause - Neither the OIA nor OPM has dedicated resources to this task.

Effect - Independent auditors performance may be substandard and audit reports may be inaccurate. Audit reports are relied upon to provide some assurance that irregularities, illegal acts, and other noncompliance with grant agreements or contracts will be detected. If audit reports are inadequate, it may present a distorted picture of a district's financial position and an important link in the overall accountability chain would be broken.

Remedy - SBE should perform quality control reviews of firms conducting audits for regional school districts.

RECOMMENDATION

The State Board of Education shall periodically perform quality control reviews of selected audits of regional school districts made by independent auditors. This quality control review shall include but not be limited to an examination of the audit firm's system of quality control for its auditing practice to ensure it has been designed in accordance with professional standards and ensure the firm's quality control policies and procedures were complied with to provide the firm with reasonable assurance of conforming with professional standards.

3. Tracking system for corrective action plans is inadequate. If the Annual Audit reveals any conditions that have or could lead to significant misstatements in the district's financial statements or noncompliance with laws, regulations, grant requirements, or recognized accounting procedures, the district is required to submit a corrective action plan. The corrective action plan must address how the district intends to remedy each finding made by the auditor, indicate who is responsible for implementing the plan, and the date corrective actions will be completed.

OIA tracks submission of corrective action plans, under the State Single Audit, and is responsible for ensuring resolution of any audit findings for regional school districts. However, this compliance function is not done directly by OIA, but typically is accomplished through the audit performed by the independent auditor a full year later.

The Office of Policy and Management also has responsibility to ensure regional school districts develop a corrective action plan in response to any findings pursuant to the Municipal Auditing Act that are different from those found under the State Single Audit Act. Most, though not all, audit findings that apply to the State Single Audit Act would apply to the Municipal Audit Act, meaning the primary responsibility for oversight would fall to OIA.

The program review committee found the system to be inadequate for the following reasons.

_ The state board's auditor does not have a system to classify the seriousness of findings and flag those that may require more aggressive follow-up or monitoring.

_ In reviewing the audit findings in all the regional districts for the last three years, a total of 11 districts had multiple years of the same findings:

• six of the same findings in five districts continued for the entire three-year period reviewed; and
• seven of the same findings in six districts were repeated in two out of the three-year period reviewed.

_ OPM also requires the submission of corrective action plans, but does not perform any independent follow up to ensure the plans are implemented.

_ There is an overlap and theoretically a redundancy in the tracking of corrective action plans addressing audit findings in regional school districts between OPM and SBE.

Cause - Neither OIA nor OPM have developed an adequate system to track findings by regional districts and ensure expeditious resolution.

Effect - Without an adequate tracking system and follow-up, the value of the audit function is degraded. If it is perceived it is not important to correct certain deficiencies, improper and serious shortcomings may linger.

Remedy - The state board's OIA needs to develop an enhanced tracking system.

RECOMMENDATION

The State Board of Education shall develop a tracking system for corrective action plans submitted by regional school districts. It shall include a classification system that indicates the seriousness of findings and establishes deadlines to correct audit findings based on their seriousness.

4. The Office of Policy and Management has not performed an analysis of the fiscal condition of regional school districts. While SBE has taken over the responsibility to monitor and follow up on the requirements of and the audit findings pursuant to the State Single Audit for regional school districts, certain oversight functions that emanate from the Municipal Auditing Act have not been performed by OPM.

Specifically, OPM performs a two-part review of annual audits it receives as part of the Municipal Auditing Act. First, it reviews every audit to ensure it meets applicable reporting standards and contains the required elements under the act. Secondly, OPM conducts an analysis of the fiscal condition of municipalities and school districts. While OPM reviews regional school district audits for compliance with professional auditing standards under the Municipal Auditing Act, it has not performed any analysis of the fiscal condition of regional school districts.

Cause - The Office of Policy and Management reviews and tracks the audits of Connecticut's 169 municipalities as well as the audits of nonprofit agencies that perform work on behalf of the state. In addition, OPM completes the fiscal analysis for the 169 towns and supports the efforts of the MFAC. However, OPM has not dedicated the resources to make certain this function is being completed for regional school districts or assigned this function another agency. The unit responsible for these duties has one supervisor, one administrative assistant, and three auditors.

Effect - Opportunities to identify and correct distressed regional school districts have been lost. An element in the fiscal accountability system is made ineffective.

Remedy - Review of audits and the fiscal analysis of regional districts should be performed by one entity.

RECOMMENDATION

The State Board of Education shall assume the responsibilities of OPM under the Municipal Accounting Act for regional school districts regarding the review of audit reports, tracking of corrective actions, and performing a fiscal analysis of the districts. The State Board of Education, in consultation with OPM, shall develop criteria to perform an annual fiscal analysis of the regional school districts.

5. The authority of the Municipal Finance Advisory Commission to require regional school districts to appear before the commission is unclear. As described above, OPM conducts an analysis of the fiscal condition of municipalities. If the analysis discloses any unsound or irregular financial practices, the Secretary of OPM is required to report these findings and propose recommendations for corrective action to the MFAC. The Municipal Finance Advisory Commission is an eight member gubernatorial appointed commission empowered to work with distressed municipalities and may compel its chief executive officer to develop and report on remedial measures to improve the municipalities' fiscal condition. Although the statute is clear concerning OPM's responsibilities in reviewing regional school district's financial health, the authority of the MFAC over regional school boards in unclear.

Cause - The statute (C.G.S. Sec. 7-394b) does not explicitly include regional school districts.

Effect - It is unclear whether regional school districts fall under the purview of the Municipal Finance Advisory Commission.

Remedy - Amend the statute to clarify that the jurisdiction of MFAC includes regional school districts.

RECOMMENDATION

Clarify C.G.S. Sec. 7-349b related to the Municipal Finance Advisory Commission under the Municipal Auditing Act to include regional school districts and require reports generated under the statute be filed with each town's board of selectmen and board of finance, if applicable, in regional districts.

6. Regional school district administrative personnel, in several districts, are involved in the selection and management of independent auditors, and auditors in most districts are not changed on a regular basis. Regional boards of education are required to file with the Secretary of OPM and SBE the name of the independent auditor conducting the annual audit at least 30 days before the end of the fiscal year. If the regional school district fails to do so, the secretary and SBE may designate an independent auditor. Independent auditors are hired by, work with, and are paid by regional school districts.

Through a survey (Appendix C) of regional school board chairpersons, program review committee staff noted the following.

_ Seven of the 14 chairs who responded to the survey indicated the regional superintendent and/or the business office manager were involved in selecting the independent auditor.

_ Nine of the 14 chairs indicated the auditor reported to the regional superintendent or the business manager. Although, seven of the nine reported the auditor also had a reporting relationship to the board chair or other board member, two reported an exclusive reporting relationship to either the superintendent or the business manager.

_ Nine of the 14 chairs stated their independent auditor had been in place for over six years, and in at least one case an auditor had been in place for over 10 years.

Recognized authorities in the financial management and auditing profession have advocated for the periodic replacement of independent auditors through a full-scale competitive bid process (e.g., Government Finance Officers Association - Audit Procurement (1996)). The longer an auditor remains on a particular engagement, the greater the possibility that a naturally-fostered familiarity will influence the auditor's judgment. It is common for requests for proposals to be solicited for independent auditors every three to six years in the public sector.

Cause - There are no specific requirements in statute regarding the selection and supervision of independent auditors for regional school districts.

Effect - Properly performed independent audits assist in preserving the integrity of the public finance function. The practices indicated by the board chairs concerning the selection and tenure of their independent auditors, as well as the auditors' reporting relationships, undermines the appearance of independence of the auditor. The selection and oversight of the independent auditor should be the sole responsibility of the board or any entity independent of regional district management. There is an inherent conflict in having the regional superintendent or the business manager having any role in choosing or supervising the activities of the auditor.

Remedy - Amend statutes and practices to strengthen state oversight of the audit function in regional school districts.

RECOMMENDATION

The State Board of Education shall regularly solicit competitive proposals from qualified and licensed auditing firms to perform Annual Audits for regional school districts and randomly assign the firms to regional districts. The audit firms shall be rotated at least every three years among the regional districts.

7. Independent auditors' credentials are not checked with State Board of Accountancy. State law requires that regional school boards file with OPM and SBE the name of the independent auditor designated to perform the independent audit but there is no requirement OPM or SDE perform a check on the credentials of the auditors selected. OPM checks the licensing status of auditors performing municipal audits, but SBE does not for regional school district auditors.

Cause - There are no statutory requirements to check the credentials of independent auditors performing annual audits for regional school districts.

Effect - Independent auditors in regional school districts performing annual audits pursuant to the State Single Audit Act and the Municipal Auditing Act may not be properly credentialed.

8. Management letter not required. Auditing standards encourage but do not require the issuance of a management letter separate from the financial audit. The management letter is an important management tool and includes concerns the auditor may have about certain deficiencies in the financial management system but are not formal reportable findings. The letter typically includes the auditor's recommendations to make the audited agency's financial management system, including internal controls and certain reporting practices, more efficient and effective.

Cause - There is not a requirement to issue a management letter in professional standards or in state statute.

Effect - Regional school board members and management may not be aware of needed improvements to correct deficiencies in the district's financial management system.

Remedy - Amend statues to strengthen the state audit requirements.

RECOMMENDATION

Audits performed for regional school districts under the Municipal Auditing Act shall contain a written management letter, in accordance with guidelines developed by the State Board of Education. The State Board of Education shall define the items that should be contained in the management letter and when one is necessary. It shall include at a minimum those issues identified by the auditor during the course of the audit that do not rise to the level of a reportable condition but indicate deficiencies with internal controls, inter-fund transactions, reserves, and financial documentation.

Findings - Local Share Formula

Changing the current allocation formula that determines local share of education expenses to a consolidated tax base in regional school districts would be disruptive to local government finances, could require an overall increase in the state's main education grant, and is not supported by the majority of town leaders in regional districts.

Background - After a regional school budget is approved by voters at an annual meeting or by referendum, the regional school board determines each member town's share of both the operating and capital expenses in the same ratio as the number of students in the town to the total number of students in the district. After the regional school budget is adopted, municipalities include their share of the regional school budget in the town budget that then must go through the local approval process. Often this may mean another referendum.

Although school expenses are determined in the district as a whole, Connecticut's regional school districts do not have separate taxing authority. They depend upon the member towns to set the tax rate for the appropriate share, send the tax bill, and collect the revenue.

The current formula operates so that each member town of regional district pays the same amount per student to support the costs of the region. Because the size of the tax base is different in every town, the mill rate assessed to taxpayers in each town is also different, even though they are purchasing the same educational product.

Issue - Some town officials in regional districts and a taxpayer lawsuit (Gabriel Seymour, et al. vs. Region One Board of Education, et al., (Docket No. CV-00-0082467-S)) have argued that the current local share cost allocation formula unfairly burdens property-poor towns and should be based on each town's ability to pay, measured by the relative size of their tax base. They assert it is fairer to combine each individual member town's tax base into a regional tax base and develop a uniform tax rate to pay for educational expenses. Other benefits have been cited for the creation of a single tax levy for regional school districts, including:

• a regional tax base would prevent unpredictable changes in the amounts charged to towns from one year to the next based on changes in the number of students;
• voters would be better able to identify what portion of their taxes are going to support regional schools;
• the current system unfairly benefits a town that is experiencing rapid growth, compared to other member towns, if additional facilities, such as elementary schools, are built that disproportionately benefit the town that is growing; and
• in conjunction with other statutory changes, it could enhance accountability by allowing regional boards to levy a tax directly, instead of the current system where one set of elected officials levy a tax to fund expenditures approved by another set of elected officials.

Opponents to changing the formula have argued the per pupil formula is fair - in that every town resident in a regional district knows they are paying the same amount per student for the same education. In addition, they believe:

• a uniform rate would create additional tensions between towns in regional districts because some towns' taxes would increase, while others decrease, without any additional benefits; and
• the size and character of each town's tax base is the result of the development and growth choices each individual town has made. Larger tax bases usually require towns to expand and improve certain municipal services, such as police, fire, and public works. Some would also argue that more development has an aesthetic cost. A regional tax base would allow a less developed town to take advantage of a member town's larger tax base, without supporting the expenses of increased development.

Effect on mill rates. Program review staff calculated the effect on each town in each regional district if their tax bases were combined and a uniform mill rate for education were applied. The detailed results and methodology are presented in Appendix F. In general, it can be noted:

• the total number of towns with mill rates that increase is about equal to the number of towns that decrease -- rates decrease in 23 towns and increase in 24;
• the average mill rate decrease is 14 percent - with a range of less than 1 percent to 50 percent; and
• the average mill rate increase is 17 percent - with a range of less than 1 percent to 66 percent.

Effect on ECS. If the individual tax bases in towns belonging to regional school districts were combined, it can be argued that change should also be factored into the Education Cost Sharing (ECS) grant calculation. This grant is the formula-based equalization aid program that provides the bulk of state money for local school operating costs.

The current formula contains a number of provisions that mitigate or prevent any reductions in aid on a year-to-year basis. Nonetheless, program review staff provide an analysis of what the potential impact could have been on FY 01 ECS funding if a unified tax base were in place in regional school districts. (Detailed results and the methodology used for this analysis are presented in Appendix G.) Compared to FY 01 total aid received by towns in regional school districts, the estimated impact of adopting a regional tax base on total FY 01 aid would have been:

• ten regions would experience an overall decrease in total aid ranging from between $325 to over $400,000 and seven regions would increase from $13 to over $200,000;
• final aid amounts in all other non-regional municipalities would stay the same or increase; and
• statewide, the total final aid amount would increase $9 million.

Survey results. As noted earlier, the program review committee surveyed municipal and regional school leaders, including first selectmen, board of finance chairs, and regional board of education chairs, and found the majority of these leaders believe the current statutory formula fairly allocates costs among member towns and should not be changed. Specifically:

• eighty-nine of a potential 109 municipal and regional leaders (82 percent) responded to the staff survey and 69 (78 percent) believed the current per pupil formula was fair;
• of the 34 board of finance chairs who responded, 29 (85 percent) thought the formula was fair, while 29 of 41 (71 percent) of first selectmen thought it was fair;
• seventy-nine percent (11 out of 14) of the regional board chairs who responded thought the formula was fair; and
• of the 19 respondents who thought the formula was unfair and indicated an alternative (one did not indicate an alternative), four (21 percent) believed a combined tax base should be used to calculate local share.

Remedy - Determining the overall fairness of the formula is a legal and political endeavor within the purview of the courts and the legislature that is not susceptible to empirical investigation. The courts have not yet issued an opinion in the Seymour case on the constitutionality of the local share formula. Absent that decision or a clear desire on the part of the municipal leaders to change the formula, and given the disruption in municipal finances it would cause and the potential impact on the ECS formula, the current local share formula appears satisfactory.

RECOMMENDATION

The current method of allocating the local share of education costs for regional school districts should be continued.

⁶ The education portion of FY 00 total budget expenditures in towns belonging to regional schools ranged from 54 percent in Middlebury (Region No. 15) to 76 percent in Barkhamsted (Region No. 7).

⁷ Regional school districts have statutory authority to deficit spend without first obtaining voter approval. Local school boards cannot deficit spend without approval from the local fiscal authority.