NEW ROCHELLE, NY -- The same week New York State Comptroller Thomas DiNapoli was announcing that his office had completed evaluating the fiscal condition of nearly 2,300 municipalities and school districts under his new Fiscal Stress Test Monitoring Program, his auditors were bringing into question the integrity of the entire project.
The Stress Test program classifies a local community or school district as being in “significant fiscal stress,” “moderate fiscal stress,” “susceptible to fiscal stress” or “no designation” based on nine financial indicators including fund balance, cash-on-hand and patterns of operating deficits. The system also evaluates communities relative to 14 environmental stress factors such as population trends, poverty rates and property values.
In January, the OSC released Fiscal Stress Test results for the City School District of New Rochelle which classified the school system as a district in “moderate fiscal stress", ranking it among the lowest in New York State and and the only "failing" district in Westchester County.
Last month, the OSC issued a Local Accountability Audit for the City School District of New Rochelle which described the district as “susceptible to fiscal stress,” a change the district has trumpeted as an "upgrade".
Both reports are based on the same set of audited financials, so the reason for the change is unclear.
The change was first made public on April 22nd during a lightly attended school board meeting as New Rochelle Board of Education President David Lacher offered his reasons for supporting the proposed 2014-15 school budget. In his remarks, Lacher disclosed the expected change in the district's stress test status.
"New Rochelle, within the last few weeks has been relieved of its designation as a school district under moderate fiscal stress." said Lacher.
The next day the OSC released its Report on the Financial Condition of the City School District of New Rochelle, July 1, 2010 - June 30, 2013 which included the following statement:
We reviewed budget-to-actual results for fiscal years 2010-11 through 2012-13 and found that District officials adopted budgets with realistic revenue and expenditure estimates. However, District officials have relied heavily on appropriated fund balance as a financing source in the annual budgets, which has reduced the District's unrestricted, unappropriated funds. In each of the three fiscal years, the Board has budgeted for planned operating deficits by appropriating fund balance to help finance the budgets. As a result, as shown in Table 1, total unrestricted unappropriated fund balance has declined from $7.2 million in fiscal year 2010-11 to $5.4 million in fiscal year 2012-13, which is a 25 percent decline. The District is considered to be susceptible to fiscal stress due to three years of operating deficits and low unassigned fund balance. (emphasis added)
From this statement, the District lifted the line "the District is considered to be susceptible to fiscal stress" and highlighted it in their official response to the draft audit dated March 27th.
We are very pleased that New Rochelle’s risk rating was upgraded after your audit from that of “Moderate Stress” to “Susceptible to Stress”
This appears to be the basis for Lacher's announcement that the District was "relieved of its designation as a school district under moderate fiscal stress."
Asked to comment on Lacher's claims, the OSC issued a statement the following day:
"We are not changing the current scores for any school district's at this point," said Mark Johnson, Deputy Press Secretary for New York State Comptroller Thomas P. DiNapoli, "Maybe they have a plan that will assist in changing their score in future years."
Perhaps, but the Fiscal Stress Test scores for next year will be based on the audited financials for 2013-14 not 2012-13.
The current Stress Test results for school districts is based on each district’s ST-3 report, a district’s Annual Financial Report which must be filed annually with the New Rochelle State Education Department.
On September 30, 2013, the New Rochelle School District filed their 2013-13 ST-3, although it was not due until December 13, 2013. That ST-3 report, for the year ending June 30, 2013, states the undesignated fund balance was $3.8 million.
In November 2013, the district responded to preliminary information from the OSC on the Fiscal Stress Test, according to a statement made by John Quinn, the District's Assistant Superintendent for Business & Administration, at a school board meeting held on January 28, 2014.
On December 3rd, the school board formally accepted the audited financials when it approved Resolution 14-135 on December 3, 2013, those financials state that the undesignated fund balance for the year ending June 30, 2013 was $3.8 million.
The Stress Test issued in January, based on the ST-3 report, states the undesignated fund balance was $3.8 million.
On January 28, 2014 John Quinn made a presentation to the board on the OSC Stress Test.
Inexplicably, Quinn failed to provide the board information about the undesignated fund balance although this was the key driver of the "failing" score on the OSC Stress Test. Instead, he presented by relying only on the aggregate fund balance.
During the Q&A after the presentation, Board Member Jeffrey Hastie requested that Mr. Quinn provide a breakdown of the fund balance including designated fund balance and undesignated fund balance.
On February 4th, Quinn provided a breakdown of the fund balance per Hastie's request in which Quinn stated that the undesignated fund balance for the year ending June 30, 2013 was $3.8 million.
Up until this point, every discussion, presentation, and set of audited financials approved by the school board, submitted to the New York State Education Department, and used by the Office of the State Comptroller has used the same figure -- $3.8 million in undesignated fund balance for the year ending June 30, 2013.
Yet, somehow, somewhere between February 4th and March 27th an entirely new number for undesignated fund balance — not seen before or since — appears.
According to Brian Butry, Deputy Press Secretary for the Office of the State Comptroller, New Rochelle's Business Manager reported to the OSC at some unspecified date prior to March 27th that there had been an error in the undesignated fund balance reported in the 2012-13 ST-3 report, that the designated fund balance for workers compensation was overstated by $1.6 million and thus the undesignated fund balance was understated by $1.6 million and so the undesignated fund balance for the year ending June 30, 2013 was $5.4 million not $3.8 million, and that as a result, the district was deemed to be “susceptible to fiscal stress” and no long experiencing “moderate fiscal stress” as indicated in January’s Fiscal Stress report.
To put that in context, the amount designated for workers compensation in the 2012-13 audited financials is $1.9 million so the supposed error amounts to 85% of the total designated fund balance for workers compensation. The increase in undesignated fund balance from $3.8 million to $5.4 million is an increase of more than 40%.
When pressed to provide some documentation as to the origin of the supposed $1.6 mm error, Butry declined instead asking that Talk of the Sound submit a Freedom of Information request. A FOIL request was filed the week before but had yet to be acknowledged by the OSC Records Access Officer.
"The difference between the fiscal stress score and what was stated in the audit is directly related to $1.6 million the district listed on their AUD in a workers comp reserve rather than their unassigned fund balance," said Butry.
According to the OSC website, "AUD" is the Annual Update Document filed by municipalities. School Districts do not file AUD's but rather ST-3's.
The ST-3 filed by the school district in December 2013, and the ST-3 on file with SED as of May 5, 2014, both for the year ending June 30, 2013, states the undesignated fund balance to be $3.8 million.
Despite this, Butry has refused repeated requests to provide any documentation that support the claim of a $1.6 million error in the District's audited financials.
"We stand by the results of our audit," said Butry.
On the eve of the release of the OSC Audit of the City School District of New Rochelle, the night Lacher made his statement claiming that the District has been "relieved" of its designation as “moderately stressed”, the board unanimously adopted, without discussion, Resolution 14-192, approving the District’s "Property Tax Report Card” for 2014-2015.
Under Gov. Andrew Cuomo's Tax Levy Cap, all school districts are required to calculate their tax levy limits and report the data to the OSC, SED and the New York State Department of Taxation and Finance and must report this information on their Property Tax Report Card which was due to SED this year on April 26th.
The District's Property Tax Report Card was filed by the District and marked “official” by SED on April 10th, long after Quinn told the OSC of the supposed $1.6 million error.
New Rochelle's Property Tax Report Card, retroactively accepted on April 22nd under Resolution 14-192, stated that the undesignated fund balance was $3.8 million, as of April 10th.
The State Aid Management System (SAMS) is "a secure information system that facilitates the collection and processing of data required by SED to distribute annual state aid to all New York school districts".
SAMS states that the undesignated fund balance for the City School District of New Rochelle for the year ending June 30, 2013 was $3.8 million.
As noted above, the current ST-3 form on file with SED, as of May 5th, states the undesignated fund balance for the year ending June 30, 2013 was $3.8 million.
An error in the 2012-13 audited financials that overstates the designated fund balance for workers compensation by $1.6 million and understates the undesignated fund balance by $1.6 million is a material change and would require the district to restate their audited financials. No such restatement has occurred, there have been no meetings with the auditor and no new ST-3 reports have been filed.
The decline in total unrestricted unappropriated fund balance reported in the OSC Audit was not from $7.2 million in fiscal year 2010-11 to $5.4 million in fiscal year 2012-13, a 25 percent decline, but from $7.2 million to $3.8 million in fiscal year 2012-13, a 47% decline.
On a related note, after the Fiscal Stress Test report was issued in January, designating the district as under "moderate fiscal stress", the District issued the following statement.
The primary factor that accounts for this rating is a declining fund balance, which is primarily the result of the economic downturn over the past few years, rising mandated pension contributions and health care costs, negative adjustments in state aid, all coupled with the tax levy spending cap. This has required us turn to our fund balance, which we had built up in better economic times, to fully fund our annual spending plans and maintain our educational programs. Beginning with the current fiscal year, we have taken steps to reduce our reliance on the use of fund balance to balance our budget. We do not now, and never have, operated on deficit spending. The issue of declining fund balance flagged by the Comptroller's Report provides a cautionary note for future budget planning. As we are beginning to develop our budget for the upcoming school year, we will be paying particular attention to the extent to which we rely on fund balance.
While the District is claiming to have never "operated on deficit spending", the recently released Comptroller Audit states "the Board has budgeted for planned operating deficits by appropriating fund balance to help finance the budgets".
As readers come to better understand the full extent of the financial irregularities in the New Rochelle school district under Assistant Superintendent for Business & Administration John Quinn and New Rochelle Board of Education President David Lacher they might then come to better understand the serious nature of the conflict of interest which came to exist when Lacher allowed himself to become beholden to Quinn on the matter of Lacher's medical insurance debts.