State Audit: CVCS Has Too Much Money In Reserves

SINCLAIRVILLE — A state audit shows the Cassadaga Valley Central School District has more reserves than state law allows, though district officials said they expect to be in compliance by the end of the year.

District officials agreed with some of the findings but warn that auditors are operating with the benefit of hindsight. District officials don’t have future knowledge of state aid to schools, the effect of unfunded mandates on school districts and increases in employee benefits, especially those based on stock market returns.

“The district has conservatively approached the budget process in the face of these challenges to ensure, to the extent possible, that the district’s educational program will not be disrupted by budgetary shortfalls, and that the district’s taxpayers will not be subjected to wildly fluctuating tax rates.”

The audit, released Wednesday by state Comptroller Thomas DiNapoli, states appropriations were overestimated by $3.2 million over a three-year period, that unrestricted fund balance exceeded the state limit by $950,000, or about 5 percent, as of June 30, 2017, and that three reserve funds were also overfunded.

Auditors said district officials need to improve the district’s budgeting practices. While the school board has passed budgets each year appropriating money from the fund balance, auditors said the district has overestimated spending, making the fund balance appropriations unnecessary. As of June 30, 2017, unrestricted fund balance totaled nearly $1.8 million and was 9 percent of 2017-18 budgeted appropriations, exceeding the statutory limit by more than $950,000, or five percentage points.

Auditors compared budgeted appropriations and estimated revenues with actual operating results for 2014-15 through 2016-17 and found that, while revenue variances were generally reasonable, district officials overestimated appropriations by more than $3.2 million (6 percent), or an annual average of $1 million. The board most significantly overestimated contractual appropriations (by $1.5 million or 13 percent) and employee benefits. While revenue estimates were generally reasonable, during fieldwork district officials indicated that certain data they provided to the state Education Department was inaccurate. As a result, the district’s 2017-18 state aid may be $336,000 less than anticipated while the district also made an apparent budgeting error in revenue estimates which resulted in a duplicate BOCES state aid estimate likely increasing the unfavorable year-end variance by $280,000.

District officials project a year-end operating deficit of $390,000 for 2018, but auditors say that may not actually happen because district officials have overestimated their spending.

Auditors estimate the district will be able to pay for the year-end operating deficit without spending any of its existing fund balance.

“The adopted 2018-19 budget includes a 5.5 percent increase ($1.2 million) in appropriations over 2017-18,” the audit states. “Further, the 2018-19 budget approved by the voters was presented as resulting in a planned operating deficit (expenditures exceeding revenues) and requiring $900,000 in appropriated fund balance to balance the budget. However, historically the District has not needed to use any appropriated fund balance because revenues have exceeded expenditures, which were not reasonably estimated.”

In addition to the yearly budget, auditors stated the district has overfunded its employee benefit accrued liability reserve, retirement contribution reserve and unemployment insurance reserve at a total of $3.9 million. The employee benefit accrued liability is $1.4 million, though the corresponding liability is only $392.000; the retirement contribution reserve is $1.4 million, though the district typically spends about $120,000 a year; and the unemployment insurance reserve is $182,000 even though the district has spent only $2,000 a year on unemployment claims over the past three years.

District officials defended the levels of money in the reserve accounts, saying the auditors claims that the reserves are overfunded is a subjective judgement.

“The laws that authorize the reserves at issue do not establish a statutory limitation on the balance of such reserves,” the district wrote in its reply to the audit. “Focusing, for instance, on the current snapshot of the district’s long-term compensated absences with regard to the balance of the Employee Benefit Accrued Liability Reserve fails to take into account the increases in that liability that can be expected from things such as future salary rate or step increases or other negotiated increases (such as one-time retirement incentives) in the value of accrued time that may be redeemed at termination of employment.”

Auditors recommend the board adopt budgets with reasonable spending and fund balances based on historical trends; develop a plan to spend the unrestricted fund balance; adopt a more comprehensive reserve policy that includes how reserves are funded, optimal levels for each fund and how the funds will be used; ensure revenue estimates are accurate; and develop a multi-year financial plan.

The district replied that it plans to keep the fund balance within statutory limits and planned to be in compliance by June 30, 2018, and will develop a new plan to establish, fund and allocate its reserves, approving that plan in July. On the issue of spending levels, district officials said they believe the district has been reasonable in the past and will continue to develop budgets that protect the district’s classroom programs in a worst-case budget scenario.

“As with one’s own personal finances it’s unrealistic to believe that a budget could be developed and implemented under that timeline which would only include exact appropriation levels,” the district wrote. “Those variables require a district to be conservative on the budgetary appropriation estimates so that programming is not stymied mid-year due to unforeseeable expenditures or by mid-year state aid takebacks. We believe it is important for our constituents to understand the district engages in a comprehensive budget development process that develops budget estimates based on realistic projections using any new information available as well as reflection on what current spending patterns are along with the past three fiscal years.”