Reforms aspects of local government and school accountability

Sections two and five of this bill would amend Subdivision 5 of Section 1608 and Subdivision 5 of Section 1716 of the Education Law to require school districts to include a schedule of all reserve funds as part of the detailed statement that is appended to the annual budget document.

Sections four, twelve and twenty of this bill would amend Paragraph e of Subdivision 2 of Section 1711, Subdivision 5 of Section 2508 and Subdivision 6 of Section 2566 of the Education Law to include deputy claims auditors to the list of positions supervised by superintendents of school districts.

Sections six, fourteen and twenty-two of this bill would amend Subdivision 1 of Section 1724, Subdivision 1 of Section 2524 and Subdivision 4 of Section 2580 of the Education Law to allow school districts with 10,000 or more students to audit samples of claims, instead of requiring them to audit every claim filed.

Section seven of this bill would amend Paragraph k of Subdivision 4 of Section 1950 of the Education Law relating to the appointment of deputy claims auditors by boards of cooperative educational services (BOCES).

Section eight of this bill would amend Paragraph q of Subdivision 4 of Section 1950 of the Education Law to clarify that BOCES may provide transportation services on behalf of school districts. including transportation to and from non-public schools. Section nine of this bill would add a new paragraph oo to Subdivision 4 of Section 1950 of the Education Law to clarify that BOCES have the authority to contract for the procurement of telecommunications equipment on behalf of school districts.

Section ten of this bill would amend Subdivision 2 of Section 2116-b of the Education Law to allow school districts with fewer than 1,000 students to forego establishing or maintaining an internal audit function. School districts that resolve to eliminate their internal audit functions pursuant to this legislative change would have to notify the State Department of Education (SED) and OSC of their decision.

Section twenty-three of this bill adds a new Section 3653 to the Education Law to require boards of education or trustees of a school district to authorize any increased funding of reserves by resolution.

Section twenty-four of this bill adds a new Section 5-c to the General Municipal Law relating to the acquisition and use of credit cards by local governments. Establishes no credit card may be used by or on behalf of any local government unless the governing board of the local government by local law, ordinance or resolution, determines that it is in the public interest. Additionally, it permits school districts and BOCES to adopt policies and procedures that allow them to act cooperatively in procuring credit card services by either entering into a cooperative procurement agreement with local governments within and outside of this state or through use of an existing cooperative procurement agreement entered into among local governments within and outside of this state where the governing board has determined that engaging credit card services pursuant to or through a cooperative procurement agreement will result in a cost savings.

Section twenty-five of this bill amends Section 6-e of the General Municipal Law to allow school districts to establish a tax stabilization reserve fund. School districts would be limited to using any moneys in this fund only to lessen or prevent projected tax increases that would otherwise be above 2.5 percent of the amount of the real property tax levy needed to finance the annual budget. This bill would require schools to appropriate any annual amounts placed in the reserve for budget purposes within three years.

Section twenty-six of this bill amends Section 6-h of the General Municipal Law to allow schools to establish a reserve for bonded indebtedness. This bill would require that schools make expenditures from this reserve only to pay the principal and interest on bonds, or to reduce principal when refunding bonds. Also, if school officials establish budget provisions during a given fiscal year to pay the principal and interest on the bonds from sources other than the reserve for bonded indebtedness, school officials would be prohibited from transferring the reserve fund moneys during that fiscal year.

Section twenty-seven of this bill amends Subdivision 9 of Section 6-p of the General Municipal Law to allow school districts to transfer excess reserve balances back to the general fund, or to an "other post-employment benefits" (OPEB) trust once it is established.

Section twenty-eight of this bill states that any school district having excess monies in an employee benefit accrued liability reserve fund established pursuant to Section 6-p of the General Municipal Law, on the effective date of this act, may make a one-time election. by resolution of its governing board adopted no later than one year from such effective date, to transfer all or part of such excess monies into the general fund of the school district.

Section twenty-nine of this bill amends Paragraphs b and c of Subdivision 1 of Section 6r of the General Municipal Law to allow schools to establish reserves for teachers' retirement system contributions. Current statutes allow schools to establish reserves only for the common employees' retirement system. This would allow school districts to reserve moneys for this largest component of their pension costs.

Section thirty of this bill amends Section 20.00 of the Local Finance Law to state that nothing in such section shall be construed to prevent a municipality, school district or district corporation from entering into an agreement with one or more financing agencies or card issuers for the issuance of a credit card or cards in the name of the municipality, school district or district corporation or from using such credit card or cards for the procurement of commodities, services and expenses in accordance with section 5-c of the General Municipal Law.

Section thirty-one of the bill would make this act effective on the first of July next succeeding the date on which it shall have become a law.

Justification

OSC's experience auditing school districts and BOCES during the last five years, as required by Chapter 263 of the Laws of2005. has resulted in OSC identifying many internal control deficiencies and issues of non-compliance with current statutes. While the superintendents and boards of education can and have rectified many of these audit concerns locally by implementing our audit recommendations. they can benefit from having available to them a greater array of statutory options. Some existing statutes should be modified to give school district and BOCES additional tools to address these audit concerns fully and to improve the efficiency and effectiveness of school operations without sacrificing good internal controls. By the same token. our audits disclosed a number of circumstances in which certain significant fiscal activities of school districts' and BOCES were undertaken without adequate transparency to the governing board and taxpayers, in some cases, because of a lack of statutory direction. This bill would address these issues in the following areas:

CLAIMS AUDITING

OSC's audits have identified weaknesses in the claims audit function in school districts and BOCES throughout the five-year audit period. While some schools may have improved their internal controls over claims auditing, some obstacles remain for them in the process of achieving an effective and efficient claims audit function. For example, it can be difficult for small districts, particularly in rural areas, to find and hire qualified, independent people or entities for the claims audit function. In some situations, the best choice for the function may be an entity, such as a BOCES, which does not meet independence standards because it would be faced with auditing, as one of the most significant claims against the school district. the payment to the BOCES itself. This bill would provide for the governing board to retain the claim auditing function over claims submitted by or on behalf of the individual or entity to whom or which the claim auditing function is delegated. This change would overcome the present "all or nothing" delegation provisions, and allow greater flexibility to district. without diminishing important controls over district expenditures.

The bill would also provide express authority for districts and BOCES that choose to create the position of claims auditor to also establish the position deputy claims auditor. Providing this authorization will help ensure that those districts and BOCES will be able to efficiently continue the claim auditing process in the absence or inability of the claim auditor or in the case of vacancy in the position of claims auditor.

In some cases, very large districts find that their claims auditing operations spend inordinate amounts of time reviewing and approving low-risk vouchers. This bill would provide those districts having enrollment of more than 10,000 students to audit a statistically representative sample of claims, in lieu of auditing each claim separately. The governing board would first need to determine that the methodology for choosing the sample provides reasonable assurances that all claims represented in the sample are proper charges against the district. Use of such sampling methods. if carefully chosen, in these very large districts can provide efficiencies, without materially diminishing internal controls.

INTERNAL AUDIT FUNCTION

As OSC has shown in its audit guidance. the internal audit function can assist districts with a variety of operational needs. including performance areas. However, many small schools struggle to maintain their internal audit function because they do not have the breadth or complexity of operations that larger districts have. which allow larger districts to maximize the benefits from using an internal audit staff. We propose allowing school districts with fewer than 1.000 students to forego establishing or maintaining an internal audit function. School districts that resolve to eliminate their internal audit functions pursuant to this legislative change would have to notify SED and OSC of their decision.

COOPERATIVE SERVICES AND EFFORTS

School districts can potentially generate operational efficiencies by using BOCES to deliver "back office" administrative and fiscal services. including accounting (e.g., payroll processing). procurement and IT functions. There is some confusion, however, over the authority for BOCES to provide certain services to or on behalf of school districts. This bill would clarify that BOCES are authorized to coordinate transportation to non-public schools and to procure telecommunications equipment on behalf of school districts. In addition, currently, school districts and BOCES are not authorized to cooperate with local governments outside of this state. This bill would authorize schools and BOCES to adopt policies and procedures that would allow them to enter into cooperative procurement agreements for credit card services with local governments both within and outside of this state in certain circumstances. Providing this authorization will enable schools and BOCES to participate in credit card contracts that provide the greatest cost savings. such as those contracts that provide rebates to participating schools and BOCES based on their level of annual purchase (i.e., the higher the total annual purchase amount, the higher the rebate percentage).

RESERVE FUNDS

OSCs audits have identified a variety of problems with how reserve funds and surplus monies generally are handled by school districts and BOCES. While the mechanisms used by the schools to fund reserves with surpluses were not always appropriate under the existing statutory scheme, we also recognize that superintendents and boards of education need greater flexibility to budget and manage school district finances adequately, especially during difficult economic times.

Currently, most local governments, but not school districts, can create reserve funds for bonded indebtedness and for tax stabilization purposes. Under this bill, school districts would be given the same option. In addition, while school districts presently can establish a Retirement Contribution Reserve Fund for contributions to the NYS and Local Retirement System (NYSLERS), they cannot establish such funds for their largest retirement payments to Teachers' Retirement System (TRS). This bill would amend the General Municipal Law to authorize use of the Retirement Contribution Reserve Fund to fund contributions to TRS, as well as NYSLERS.

Our audits also disclosed that many districts and BOCES had over funded their reserve funds for Employee Benefits and Accrued Liabilities ("EBALR") in some cases because school district erroneously were under the impression that these reserve funds could be used to fund retiree health insurance. Under current law, these reserve funds may be used only for cash payments for accrued, unused leave credits payable upon separation from service. In other situations. school districts were constrained as to their choices for eliminating the excess funding under the current statute, GML . 6-p. which limits districts to transferring excess fund to other reserve fund. Under this bill, school districts will now be able to transfer excess EBALR monies into reserve funds for three additional purposes: bonded indebtedness, tax stabilization and TRS contributions. In addition, under a separate OSC Program Bill, school districts and other local governments would be able to establish trusts to fund "Other Post Employment Benefits (OPEB)," including retiree health care, and excess monies in any discontinued EBALR would be payable into this trust. Also, since excess funding in an EBALR represents monies that often would otherwise have been used to offset taxes raised for current operating expenses, the bill allows school districts to transfer excess EBALR monies into the general fund upon discontinuance of the fund.

In our audits, we also found that there were a number of situations when school boards did not have current information about hr amount in the district reserves. Without this key information, school boards cannot effectively manage the finances of the districts. To avoid this situation and increase transparency in school district fiscal operations, the bill would require that all transfers into reserve funds be made pursuant to board resolution, and that a schedule of all reserves, including the balance in each reserve fund and any plans for use of the reserve in the ensuing fiscal year, be included in a schedule appended to the annual budget document.

The Comptroller urges passage of this legislation.

Effective date

First of July next succeeding the date it shall have become a law.