The District needs to improve its controls over payroll processing. Although the payroll clerk performs procedures to double check her own work, the review process should involve someone independently reviewing payroll prior to processing. Such a review could include comparing payroll source documents, such as signed time sheets, to payroll reports to verify that hours or days worked agree and reviewing payroll change reports which show the changes from one payroll to the next. Although we did not identify any material discrepancies, the lack of adequate oversight of the payroll clerk's duties increases the risk that errors or irregularities in the processing of payrolls could occur and remain undetected, or not be detected in a timely manner.

The Board and District officials could improve their efforts to ensure retirees enrolled for health insurance benefits are eligible. The Board has not developed written policies or procedures to monitor retiree health insurance eligibility. The District also made payments to providers totaling $3.6 million without receiving support indicating enrollee information and/or premium rates. Further, District officials are not proactively ensuring the continued eligibility of retirees. As a result, the District has an increased risk that it could be paying for ineligible enrollees.

District officials managed fund balance responsibly in accordance with statute. Real Property Tax Law allows a school district to maintain up to 4 percent of the ensuing year's budget as unrestricted fund balance. The District has maintained approximately this amount of unrestricted fund balance for the three fiscal years that we reviewed. District officials' adopted budgets were reasonable because revenues and appropriations were based on known sources and historical trends. Furthermore, District officials adequately monitored the budgets throughout the year. Although total reserves remained relatively flat, we analyzed the individual reserves and determined that the reserve for compensative absences is overfunded. This reserve must be used only for cash payments for accrued and unused sick, vacation and certain other leave time owed to employees when they leave District employment. As of June 30, 2015, we determined the District's liability for compensated absences was approximately $1.3 million. However, the reserve balance was over $2.4 million. Therefore, the reserve was overfunded by approximately $1.1 million. While District officials effectively managed financial operations, the Board should have adopted a reserve policy that established the reserves to be used, how they would be funded and when they would be used.

The Board and District officials need to improve the budget process to ensure that adopted budgets are reasonable, allowing them to effectively manage the District's financial condition. The Board overestimated appropriations in the adopted budgets in four of the past five years. This generated almost $4.3 million in combined operating surpluses from 2010-11 through 2014-15. While the Board used operating surpluses to fund various reserves and capital projects, they also appropriated an average of $1.8 million in fund balance as a financing source in the annual budgets over this period. However, District officials used appropriated fund balance to fund operations in only one year. As a result, 84 percent of the amount appropriated was not needed due to operating surpluses. When the unused appropriated fund balance is added back to fund balance, the District's recalculated unrestricted fund balance ranged between 10 and 12 percent of the ensuing year's appropriations, exceeding the 4 percent limit in the last four fiscal years.

The Board and District management effectively managed the District's financial condition. The District's unrestricted fund balance from fiscal years 2010-11 through 2013-14 remained consistent at approximately 1 percent of the subsequent year's appropriations. For the 2014-15 fiscal year, the unrestricted fund balance was $4,237,425, or 4 percent of the subsequent year's appropriations, which is a significant increase from prior years. The District's 2014-15 fiscal year financial position improved significantly primarily because the District sold a school building. The District sold the building for $8.5 million and put $5 million of the proceeds toward the funding of a voter-approved capital project for improvements to the high school and middle school. We also reviewed the District's 2015-16 adopted budget and determined that revenue and expenditure estimates appeared reasonable. We commend the Board and District management for taking positive action in managing the District's financial condition.

District officials did not maintain fund balance in accordance with statutory requirements. The unrestricted fund balance exceeded the statutory limit of 4 percent of the ensuing year's budget for each of the last three years, ranging from 5 to 11 percent. From 2012-13 through 2014-15, the District's unrestricted fund balance increased by $568,000, or 108 percent. As of June 30, 2015, the District's reported unrestricted fund balance totaled $1.1 million, exceeding the statutory limit by $691,000. Further, over these three years, the District actually used $382,000, or 18 percent, of the $2.2 million of fund balance appropriated to finance operations. During 2014-15, District officials appropriated $681,641 to help finance the 2015-16 budget; however, we project that they will use about $121,000 (18 percent). As such, the District's unrestricted fund balance will continue to exceed the statutory limit. District officials have established a repair reserve in 2015-16 with some of the excess funds. However, over the last three years, when unused appropriated fund balance was added back, the District's recalculated unrestricted fund balance exceeded the statutory limit each year, ranging from 13 to 16 percent of the ensuing year's budget.

District officials did not effectively manage cafeteria operations. District officials did not perform a cost-per-meal analysis and did not always consider past productions when planning future meals, which contributed to the cost of producing a meal exceeding the price charged. As a result, the general fund is subsidizing the school lunch fund, on average, $66,000 annually. District cafeteria staff do not produce the meals in a productive manner. The District's productivity level for meals per labor hour (MPLH) is not within the industry averages. Although the industry averages may not always be achievable given certain District conditions, District officials can use the industry averages to monitor operations and work towards increasing productivity, when necessary. District officials should actively monitor the MPLH to improve the operational productivity. Further, District officials did not adequately segregate duties over the collection, accounting and depositing of money or implement adequate mitigating controls, which increases the risk of recording and depositing errors or irregularities.

District officials established adequate procedures for payroll to ensure employees were accurately paid at their approved salaries or wages. Establishing and adhering to a good system for processing and verifying payroll payments helps ensure that employees will be accurately paid their salaries and wages. We commend District officials for establishing an effective system that ensures the accuracy of compensation paid to employees.

District officials employed budgeting practices that generated operating deficits, but only used a fraction of the appropriated fund balance to fund operations. This resulted in fund balance appropriations that were not needed. As a result, during the 2012-13 through 2014-15 fiscal years, the District's unassigned fund balance was 9.65 to 12.35 percent of the ensuing years' budgets, while the statutory limit for fund balance was 4 percent. In addition, the Board transferred moneys to the District's reserves without calculations or justifications for the funding levels in the reserves and maintained balances in the unemployment insurance reserve and workers' compensation reserve that were excessive because those balances could fund related costs for 15 years and six years, respectively. These budgeting practices increase the risk that funds will not be used productively and that tax levies will be higher than necessary.

The Board did not effectively manage reserves and fund balance. We found that, as of June 30, 2015, the District had an account for post-employment benefit liabilities totaling over $7.1 million when there is currently no authority to reserve funds for this purpose. District officials also could not provide documentation for the establishment of its unemployment reserve fund. Additionally, three reserve funds with balances totaling over $1.5 million may be excessively funded. Had the unauthorized post-employment benefit liability funds been properly reported, total unrestricted fund balance would have been 23 percent of the ensuing year's budgeted appropriations, far exceeding the statutory limit of 4 percent. The District also did not use appropriated fund balance of $1.62 million, which would further increase the unrestricted fund balance beyond 23 percent.

District officials need to improve the budget process to ensure general fund budget estimates and fund balance are reasonable. From 2010-11 through 2014-15, District officials planned operating deficits and appropriated $11.7 million of fund balance each year. However, because officials' consistently overestimated expenditures, the District experienced operating surpluses totaling more than $4 million over these years and, therefore, used only $115,765 (1 percent) of the appropriated fund balance to finance operations. District officials also set aside $3 million in four reserves that have not been used. Unrestricted fund balance for these five years ranged between 13 and 15 percent of the ensuing year's appropriations, exceeding the statutory limit. As a result, District officials missed the opportunity to reduce the tax levy.

The Board developed an adequate process to ensure that claims were accurate, valid, properly supported and for legitimate District purposes. However, the claims auditor's practice is to verify the vouchers or invoices against the purchase order only. The claims auditor does not verify the vouchers or invoices against quotes, bids or contracts. Furthermore, the claims auditor does not require that these documents be attached to the claim package. As a result, the claims audit process is not as effective as it should be.

The Board did not adopt structurally balanced budgets or properly manage fund balance. The Board consistently adopted budgets that appropriated fund balance to finance operations without a clear understanding of the amount of fund balance available to appropriate. As a result, the total fund balance in the general fund declined by over $1.5 million, or 70 percent during the past four years. As of June 30, 2015, the District's unrestricted fund balance was $143,945, or 0.6 percent of the ensuing year's appropriations.

While the Board has established written regulations relating to cash receipts and non-payroll disbursements procedures, District officials and employees did not always comply with these regulations. We found that the clerk did not issue receipts for all money collected or maintain a record of all money received. In addition, there was no process in place for someone independent from the record keeping function to verify that funds were deposited into a District bank account as required by Board regulations. In addition, the Business Manager serves as the District Treasurer and has authority to sign checks, make journal entries without review, prepare monthly bank reconciliations and has full administrative rights to the District's financial system. As a result, the Business Manager has the ability to control all phases of non-payroll disbursement transactions, which could allow her to make improper transfers and payments and then conceal these activities by creating misleading entries in the accounting system. The Board and District officials have implemented compensating controls to help reduce risks such as assigning an individual independent from the Business office to review bank reconciliations prepared by the Business Manager and requiring the Superintendent to review audit trail reports generated from the financial system. However, District officials' implementation of these control procedures could be improved.

We found that District employees received and used leave accruals in accordance with individual employee contracts and collective bargaining agreements. District officials implemented specific procedures to ensure employee leave accruals were earned in accordance with the employee's applicable contract. We also found District officials established effective procedures to ensure the accrual and use of leave time were recorded accurately. We commend District officials for designing and implementing adequate procedures for the accrual and use of leave time.

The Board and District officials have not effectively managed the District's fund balance and reserves. The District's year-end unrestricted fund balance has exceeded the statutory limit for the past three years. As of June 30, 2015, the District's unrestricted fund balance was 9.2 percent of the next year's appropriations, or $2.6 million over the legal limit. Furthermore, the District overfunded the employee benefits accrued liability reserve by about $7.1 million and the tax certiorari reserve by about $1.5 million as of June 30, 2015. Consequently, the District has accumulated approximately $11.2 million in excess funds, representing 22 percent of the 2015-16 budget. The accumulation of these excess funds has resulted in the District's tax levy being higher than necessary to sustain District operations. Finally, District officials have not established a formal multiyear financial or capital plan to help ensure that these excess funds are properly used to benefit District residents.

During our audit period, the Board and District officials did not develop reasonable budgets or effectively manage the District's financial condition to ensure that the general fund's unrestricted fund balance was within the statutory limit. The Board overestimated appropriations in the 2011-12 through 2014-15 budgets, which caused the District to realize operating surpluses totaling nearly $10.5 million during those four years. In addition, during the same four-year period, the District's budgets included appropriated fund balance totaling nearly $32.7 million (an average of approximately $8.2 million annually), which should have resulted in planned operating deficits. However, because the District overestimated expenditures in its budgets, it realized operating surpluses of $10.5 million. Therefore, none of the appropriated fund balance was actually used. By not using the appropriated fund balance, the District's unrestricted funds significantly exceeded the statutory maximum of 4 percent of the ensuing year's budget. When unused appropriated fund balance is added back, the District's recalculated unrestricted fund balance was between 17 and 20 percent of the ensuing year's appropriations, which is about five times the statutory limit. The District appropriated $94.2 million for the 2015-16 budget, which included $7.06 million in appropriated fund balance. However, we project that it will not be needed. As a result, we expect that the District's unrestricted fund balance will continue to exceed the statutory limit.

District officials did not maintain fund balance in accordance with statutory requirements. The District's unassigned fund balance has exceeded the statutory limit in two of the last three fiscal years. In an attempt to comply with the 4 percent limit, upon advice of their certified public accountant, District officials erroneously classified almost $1.2 million of surplus funds as other restricted funds and in a reserve for tax reduction. For the 2012-13 fiscal year, $873,000 was classified as other restricted fund balance, and for the 2013-14 fiscal year, $315,000 was classified as a reserve for tax reduction. As a result of these errors, the District's unassigned fund balance did not include funds that should have been included when calculating the statutory limit. During 2014-15, District officials reported these funds as unassigned fund balance after they realized these funds were truly unassigned. Currently, officials have no plans to expend these excess funds.

Although the Board has developed a procurement policy, the corresponding regulations do not provide guidance or requirements for seeking competition when procuring professional services or for documenting the method of selecting professional service providers. In fact, the purchasing regulations indicate that the procurement procedures for seeking competition are not required when procuring professional services. In discussion with District officials, we confirmed that their regulations were developed based on a general misconception that District officials are not required to seek competition when procuring professional services.

The Board and District officials should do more to ensure the accuracy of biweekly payrolls. The payroll clerks are performing incompatible duties related to payroll processing, and District officials are not sufficiently monitoring or reviewing their work. In addition, the Assistant Superintendent for Business is certifying payrolls after the payments have been disbursed, which increases the risk that the District may not detect incorrect payroll payments.