Chapter Five

Fiscal Oversight and Accountability

Fiscal oversight is a key function in ensuring accountability in Connecticut's education system. Evaluation of the oversight function requires an examination of its principal components - the budget development, adoption, and administration process, as well as the independent post-audit of financial transactions.

Unlike local school boards that share responsibility with local government in reviewing fiscal activities, regional school boards are solely responsible for exercising fiscal oversight during the budget development and adoption process. Both local and regional school districts may exercise considerable independence from local governments in administering their budgets, while state-mandated independent audits are required of all school districts to ensure their fiscal integrity.

This chapter focuses on identifying the roles and responsibilities of the various government entities involved in performing fiscal oversight and ensuring financial accountability in school districts. In addition, this section provides a description of the significant differences in the scope of authority given to regional school districts by Connecticut law compared to school districts falling within local government jurisdiction.

Role of Boards of Education and Superintendents

Authority. Both local boards of education and regional boards of education have a considerable amount of responsibility and authority under state statutes. Connecticut statutes clearly establish a measure of independence for school boards from municipalities, in that they are in part agents of the state and they are to rely on their own assessment in determining what types of educational experiences they think will be best for the district. Although this often is a source of tension between boards of education and town governments, it can be magnified in regional school districts where local fiscal authorities have no oversight role or input into financial matters.

Under Connecticut law, there are major differences in the powers given to regional boards of education that local boards of education do not have and include the authority to:

• propose school budgets directly to voters;
• be a body politic (can own, rent, or lease property, enter into contracts, bond, etc.)
• deficit spend;
• borrow money; and
• ask voters for a supplemental budget increase.

For all of the actions cited above, local boards of education must defer to the town finance authority, and are not empowered under statute to take any of the actions without their approval. More autonomy was granted to regional school districts because of their multi-town nature.

School board members. School board members are responsible for governing the district, and hold part-time and largely policy-orientated positions. No fiscal expertise is required to be elected as a board member (or any other elected officeholder for that matter).

Personal liability. Connecticut General Statutes Sections 7-348 and 7-349 prohibit town officials from expending or entering into any contract that exceeds appropriation and makes the official personally libel for such over-expenditure. It is arguable whether this provision applies to school board members because of the dual nature of their position as a state and local agent. However, Connecticut law does require regional board treasurers be bonded.

Superintendents and business administrators. Boards of education hire the superintendent of schools and rely on superintendents and business managers to provide them with accurate budgetary and fiscal information upon which to take positions and make spending decisions. The manner in which school administrators communicate with board members about fiscal matters and how the board in turn communicates with other public officials and the public at large are critical components of the accountability continuum. However, no statutory guidance is provided in terms of the information board members should receive.

Budget Development, Adoption, Administration

Contrary to many other states, all school boards in Connecticut are fiscally dependent (i.e., have no taxing authority). (As shown in Appendix B, all regional school districts in New England are also fiscally dependent). Structurally however, regional school boards in Connecticut have much greater discretion over their education budget than local boards of education. In contrast to local boards of education who must submit their education budgets for approval to the local budget-making authority (i.e., board of finance, board of selectmen) there is no such intermediary between voters and the regional board to consider the financial condition of the member towns. Rather, fiscal oversight of regional school board budgets at the town level is addressed only by eligible voters voting at the annual regional school district budget meeting or by referendum of member towns.

Budget development. Local and regional boards of education are responsible for developing an itemized budget each fiscal year to operate the schools. The process for budget development, adoption, and oversight for on-going administration illustrates the autonomy of regional school boards in governing regional school affairs when compared to the scrutiny local school boards come under.

Local boards. For local school boards, a proposed school budget is reviewed and approved by the local fiscal authority that considers the school budget in conjunction with other competing municipal needs. While the boards of finance may not reduce individual line items in the proposed school budget, they may reduce the total dollar amount requested. After the budget is approved by the board of finance, the school budget gets incorporated into the town's total budget and is adopted according to local procedures by either a vote of the legislative body, the town meeting, or referendum.

Members of boards of finance often bring a different perspective to budget deliberations and are more likely to focus on balancing the fiscal needs of the entire municipality. Boards of education members are often viewed as education advocates focusing on a single purpose. Members of boards of education however, view the education mission as unique and educational policy as complex. Therefore, they feel they are better suited to determine budget priorities. The two views often result in a clash of priorities.

Regional boards. As discussed in detail in the previous chapter, regional boards also develop a budget but the regional school budgets are not subject to review and approval by a member towns' governing or fiscal body. Regional boards obtain approval directly from voters at either an annual regional district meeting or through referendum.

As noted in Chapter IV, the level of interaction with local fiscal authorities varies by regional district and it is not required by statute. Thus, in order for fiscal oversight to be diligently exercised under the regional school framework, voters must be sufficiently informed about the region's fiscal activities and knowledgeable about the districts needs. While actual community involvement practices may vary across regions, voters have only two public opportunities, under statute, to participate:

• at the public hearing held by the regional school board to present the proposed budget; and
• two weeks later at the annual regional school board meeting to vote on the budget or in the referendum.

A few observations can be made about the process up to this point:

• both the public hearing and the annual meeting occur after nearly all the budget workup is completed. Although, a few boards may hold budget workshops, it is unclear how many voters devote time to this effort;
• property owners must understand the regional school budget determines a portion of the property tax rate, and understand how it gets incorporated into the town budget that still must be voted on and passed; and
• if the town budget is not adopted, the only portion that can be reduced is the town portion, since the regional school budget was previously adopted through a separate vote.

Some additional confusion is possible in the eight regional districts that provide education only for the upper grades (7-12 or 9-12). The lower grades are governed by local boards of education, which develop budgets subject to review by a town's boards of finance (or other fiscal authority in the town). Voters in these 27 towns must discern which budget vote is for which entity, with different checks and balances occurring for the local school budget.

Budget administration. With regard to the provision of educational services, local and regional boards may act independently of the town government. For example, once the budget is passed, the board of education may expend those funds at its discretion. All school boards may transfer funds among line items without any review or prior approval, with the only requirement being that it must announce any transfers it has done at the next board meeting.

Administrators' role. Superintendents of schools and school business administrators hold key positions in ensuring the fiscal integrity of school districts. Superintendents are responsible for the supervision of schools and have executive authority over the school system. Budget development, day-to-day administration of the budget, and keeping the board informed of financial status are the responsibility of these two positions. Their central importance is recognized by the legislature as superintendents and business administrators must be certified by the State Board of Education.

Accountability through Charter Provisions

Municipal charter provisions. Municipal charters may also be a source of control and accountability over school boards. The reach of charters in regulating school boards, though, is fairly limited. Charter provisions are only binding upon local school boards as long as the provision is not "inconsistent with or inimical to the efficient operation of the district" (Local #1186 v. New Britain Board of Education, 182 Conn. 93 (1980)). Other than the few instances where this has been tested in courts, determining when a school board is subject to town controls and when it may act independently is a continuing challenge.

Recall. The power of recall, that is the ability to remove elected officials during their term in office by a vote of the people, is one extreme form of holding officials accountable. The Connecticut Supreme Court held towns do not have the ability to recall elected officials because the legislature has not explicitly granted this power to municipalities and the authority is not implied in other powers. Only five municipalities (Bristol, Milford, New Haven, Stratford, and Westport) have valid recall provisions because they were granted the authority by special act before the enactment of the constitution's home rule provision (Simons v. Canty, 195 Conn. 524 (1985)).

However, even if a town had a recall provision, it probably would not be binding upon school board members. The Superior Court has ruled a recall of a school board member is not allowed because recall provisions in a town charter cannot apply to school board members because they are agents of the state. (Sherman v. Kemish, 29 Conn. Sup. 198 (1971)). Furthermore, even if recall were allowed in towns in regional school districts, the difficulty would remain because regional school districts comprise two or more towns with differing charters.

State Oversight of Regional School Districts

General supervision and implementation of the state's educational interests rests with the state board of education and its administrative arm, the state department of education. The department of education uses three mechanisms to ensure fiscal accountability. The first two - the minimum expenditure requirement (MER), and the statutory "no supplant" provision are designed to ensure towns use state equalization aid to support elementary and secondary education.⁵ These are reviewed by the department, and if underpayments identified, towns are required to appropriate additional funding.

The third oversight mechanism used by the department, and the focus of the discussion below, requires an annual audit of grant programs to verify the validity of the school district's financial transactions.

Audit function. Perhaps the most important state fiscal oversight function is performed by the Office of Internal Audit (OIA), whose director reports to the State Board of Education (SBE), and the Office of Policy and Management (OPM). 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 responsibility for overseeing that the requirements related to the audit of the combined general purpose financial statements remains with OPM. The board of education's OIA conducts construction and grant data audits and may also perform audits or reviews of specific problems or irregularities reported to them outside the normal audits identified above.

Audit Process

Selection of auditor. Independent auditors are hired by each regional school district to perform the annual audit as well as audits of grant data. Each district must hire an auditor at least 30 days before the end of the fiscal year or OPM will assign an independent auditor. State statutes establish the minimum requirements to be considered an independent auditor but do not contain any provisions regarding auditor selection.

Scope of audits. Except for the grant data audit, which is prepared under the guidance of SBE, the audits are performed in accordance with Generally Accepted Government Auditing Standards. The state and federal single audits cover each district's entire financial operation and determines if:

• financial statements are presented fairly and in accordance with Generally Accepted Accounting Principles;
• expenditures of federal and state aid are presented fairly in relation to total financial statements;
• auditor has understood and tested internal controls - that is the process used to ensure the reliability of financial reporting and the effectiveness and efficiency of operations; and
• the district has complied with laws, regulations and grant or contract provisions relating to state and federal programs.

Audit reports must be filed with OPM and SBE within 30 days of the report's completion and no later than six months after the close of each fiscal year. The OIA may assess penalties against any audited agency that does not complete an audit, including the suspension of state financial assistance. Over the last three years however, no penalties have been assessed.

Audit integrity. In the case of regional school districts, the state board's OIA is responsible for ensuring the integrity of the audit and monitoring the implementation of corrective action plans. The completed audit is submitted to OIA and its responsibilities include:

• performing a "desk review" of each audit;
• informing other state agencies and appropriate law enforcement officials of any irregularities or illegal acts;
• ensuring the sufficiency and resolution of any corrective action plans;
• reporting disallowed costs to the grants office within SDE; and
• assessing penalties, if necessary, for noncompliance with the State Single Audit Act.

Desk review. The desk review consists of a checklist for both the state and federal single audit that guides the OIA reviewer through a series of reporting standards and elements required in every audit. This review will indicate if:

• the audit reports meet applicable reporting standards;
• any follow-up audit work is needed;
• any audits require follow-up quality control reviews; and
• any audit issue requires management attention.

The desk review has a two-fold effect in that it can indicate both auditor and auditee deficiencies. If OIA identifies deficiencies in the audit methodology, OIA is empowered to conduct quality control reviews of audits conducted by independent auditors at its discretion. In addition, the regulations governing the single state 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. However, the OIA has not conducted quality control reviews in the last three years.

Corrective action plans. If the 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 the plan, and when the corrective actions will be completed.

The OIA tracks submission of the corrective action plans and is responsible for ensuring resolution of any audit findings. This compliance function is not done directly by OIA, but typically is accomplished through the audit performed by the independent auditor in the next year.

Audit findings. Program review staff obtained data from OIA concerning audit findings for the State Single Audit in regional school districts. Table V-1 shows 12 types of findings by regional school district for the last three years.

As the table indicates, there were a total of 74 findings among 12 districts over the three-year period. Five districts did not have any findings within that timeframe. Regional district No. 12 and No. 16 had the most findings with 14 (19 percent) and 10 (14 percent) findings respectively.

The three most prevalent findings were in the areas of inadequate accounting records, fixed assets reporting deficiencies, and "other" findings. Other findings included such things as the need to update accounting procedures manuals, improper calculation of rental rates for school property, and the improper payment of sales taxes. Other trends were noted among the findings, including:

• of the 51 audits reviewed over the last three years, six (12 percent) were issued as qualified opinions on behalf of the auditor, meaning that departures from Generally Accepted Accounting Principles were noted and, therefore, the accuracy of certain aspects of the audit may be affected. One region, No. 12, had three successive years of qualified audits;
• three findings out of the 74 reported were considered "material," the most serious kinds of findings in that a condition exists that could lead to a significant misstatement of the financial statements and would not be detected by employees in the normal course of performing their duties;
• a total of 11 districts had multiple years of the same findings over the last three years;

_ 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-period reviewed.

Construction audits. The internal audit office also is directly responsible for conducting separate audits of construction projects after their completion but before final payment is made by the state. The audit assures the district has complied with the statutory and contractual provisions governing construction projects. Over the last three years, the OIA has conducted audits of 11 projects in five regional districts. Five audits have resulted in over $350,000 in disallowed costs.

⁵ See LPRI&IC 2001 report on Education Cost-Sharing for a description on how the state ensures these requirements are met.