The audit comes as a result of state legislation, passed after an embezzlement scandal in Long Island's Roslyn School District came to light in 2004. Since then, the comptroller's office has been pursuing audits of districts across the state. And while the audit, spanning July 2007 through October 2008, found that Ellenville was free of fraud and corruption, the discovery of a surplus of over $10 million in the general fund has shone a harsh light of scrutiny onto the district's accounting practices.

Published last week by the New York State Comptroller's Office, the audit reports that the district had roughly $10 million in excess funds in the budget, $8.5 million of which is illegal. When a preliminary report was sent to the district in September, the school administration responded by denying some of the audit's allegations, and admitting to others. The auditors didn't budge in their response to the district, however, and the district must comply with their recommendations. In the end, the district needs to implement a Corrective Action Plan that addresses the audit's concerns, and find a way to use the surplus to benefit the already cash-strapped district taxpayers, by lowering taxes or paying off other debts or liabilities, for example.

Explaining the Budget "Surplus" While you might think that hearing about a budget surplus rather than a deficit is cause for celebration, the Ellenville School District's "surplus" is less than good news. "Surplus" is somewhat of a misnomer: the audit has identified "unreserved, unappropriated fund balances" — in other words, funds that either should have been spent or allocated to different accounts. Here are a few of the reasons this is not good news for the community, and possible consequences district-residents could face as a result. It's illegal. While the audit's findings are unlikely to result in a lawsuit, fines, or any other penalty, New York State only allows for a surplus of 4 percent of the district's budget. By holding onto funds at a rate far over the legal limit, the district is breaking the law, no matter how good the intentions or prudency of keeping extra money in the budget. It overcharges taxpayers. While this past year's tax increase was quite moderate, the fact of an increase coinciding with the district collecting money it wasn't spending is an affront to taxpayers. At a time of great economic distress, every dollar counts to the residents of the district. It harms the district's credibility. Each year, the school's administration releases statements about how they try as hard as possible to keep any tax increase low. A large budget surplus makes it appear as though the tax increase the voters approved wasn't actually necessary — and will certainly raise the level of skepticism the next time the district needs to raise taxes. Furthermore, the appearance of having excess funds could weaken the district's position in union contract negotiations. The governor is using it to justify proposed cuts. Over the next few weeks, proposed mid-year cuts of school aid of up to $686 million could be approved by the state legislature. In trying to sell his proposal, Governor David Paterson has cited the fact that nearly every school district in the state has more funds in reserve than what has been proposed in cuts. While the proposed cut to Ellenville's aid is the second-lowest in the county at $535,203, the existence of Ellenville's surplus – and 95 percent of other school districts' surpluses — is being used as cover for a politically unpopular maneuver. It could result in further cuts of state aid to the district. While nothing is definite, the possibility exists that a district's surplus may provide justification for further cuts in state aid in future state budget years. State aid was already significantly cut last year, and with no additional federal stimulus funding on the horizon, a decrease in state aid will either force painful budget cuts or a significant property tax hike for already over-taxed residents.

The state allows for a school district to have 4 percent of its general fund left over each year as an unreserved or unappropriated fund. The Ellenville School District, however, reported a 4.95 percent surplus in their $39 million budget, or about $2.1 million, already exceeding the state maximum. Coupled with the findings of the audit, the unreserved and unappropriated funds grew to over 24 percent of the total budget, "well exceed[ing] the amount allowed by law and represent[ing] additional moneys that could have been used to benefit district taxpayers," according to the audit.

The district agreed in its response that an additional million dollars in its budget were indeed unreported excess funds, putting the agreed-upon total of surplus at about $3 million, nearly double the legally allowed amount.

According to School Superintendent Lisa Wiles and School Business Administrator Stuart Mattey, the money had been devoted to pay for various liabilities, and wasn't actually unreserved.

"Perhaps we didn't put it in the right slot, and it really should've been put in a proper reserve, according to the comptroller, and then we would be in the 4 percent," explains Mattey of the findings. "It's really a question of where that money is slotted." Mattey took his position with the district at the beginning of the school year, taking over for Christine Anatoli, who had worked on the budgets being audited.

The audit also found $2.2 million in capital project funding that was improperly budgeted; Wiles said that the money to pay for projects such as fuel tank removal (a state mandate) was approved by the voters when the budget was initially passed. The audit, however, states that projects must be individually approved by voters each year, and that a capital reserve fund must be established if the money isn't going to be spent during the year it was approved. While voters approved shifting the money from one year to the next into a capital projects account as a line item within the budget itself, such a move would have to be approved by the voters in a separate referendum, according to the state.

New York State law does not currently allow the district to hold the money within its general fund for over a year.

"At the end of the year, they should've paid for [those liabilities] and shouldn't have anything left over," says Emily DeSantis, a spokesperson with the State Comptroller's Office. "It's the general fund. There is no mechanism for them to save and create a reserve fund for this thing. There's no law right now that allows them to do that."

Currently, the district is working with its accounting firm, Sickler, Torchia, Allen & Churchill, to bring its accounting practices more in line with the audit's recommendations.

The administration, as well as representatives within the New York State School Board Association (NYSSBA), believe, however, that the excess fund balances — which are reportedly being found in 95 percent of school districts across the state — are actually being used as a scapegoat to justify the midyear cut to school aid proposed by New York State Governor David Paterson, as well as potential future cuts to state education aid.

"We don't know whether or not there are going to be midyear cuts; we don't know what their approach will be during budget negotiations. And next year we do know the Division of the Budget's suggestion so far — and through the governor — that there be midyear cuts, and that those cuts be based on a district's ability through its reserve funds to make up for those cuts with reserve funds that they have on hand," says David Little, Director of Government Relations with NYSSBA.

"It's a suggestion the [Division of the Budget] has offered informally for how they might go about it."

Trustees on the district's school board are also in the administration's corner, as board members Santo "Chan" Rivera and Ray Matthews both say that the board is behind Superintendent Wiles "100 percent."

"There's an organization [New York State] that does not know how to manage their money that's telling us how we should manage our money," said Matthews, citing the state's lurch towards bankruptcy.

The Great GASB
The largest amount of unappropriated funding found was about $4 million under the "Retirees Health Insurance" account spanning the 06-07 and 07-08 school years. The audit states that this money should be accounted for as an "other post-employment benefit," or OPEB, and that because insurance premiums are paid at the beginning of each fiscal year, this money should already be spent.

According to Superintendent Wiles, however, these funds are being held in order to comply with GASB 45, a provision from the Governmental Accounting Standards Board. The provision states that government or municipal entities such as school districts need to measure and report the costs of paying for current and future retirees projected health insurance costs. But the district has been collecting the money to pay for these liabilities — while the comptroller's office says that GASB 45 only requires districts to estimate and report these costs. "It asks for an accurate account of what their liabilities are in the future," says DeSantis. "They had to estimate that — it didn't say they had to have that."

Ironically, the state comptroller's office published a memo in 2008 urging for the state to pass legislation allowing municipalities and other taxing entities to create special trust funds for these costs. In attempting to prepare for such legislation, however, the district seems to have broken the law in doing so.

"I do believe that, and I think the comptroller believes that, there's a purpose for GASB 45, to do long term planning, to be fiscally prudent," says Wiles.

"It just doesn't seem like they're all on the same page," adds School Business Administrator Stuart Mattey.

"We're working with the external auditors, and we're working with the attorneys, because we don't want to break any laws," says Wiles, who says that the district is currently coming up with a Corrective Action Plan to conform to many of the audit's recommendations.