City school district gets scathing audit

PHOTOGRAPHER: Kathleen Moore

The Schenectady school district has received a blistering audit from its independent fiscal analysts for fudging numbers in last year’s budget.

The district also made serious mistakes in its handling of the state Contract for Excellence grant — for the second time.

Bonadio & Co. audited last year’s books and highlighted both problems.

The most serious mistake involved $3.4 million in taxes owed by the city, the auditors said.

The city never paid that revenue. Yet the district recorded the money as if it had received it.

The city must pay school taxes for any property owner who fails to pay their bill, but the city has two years to make the payment. City officials informed the school district mid-year that the money wasn’t coming right away.

School board President Cathy Lewis said the school district recorded the $3.4 million as “paid” last year to avoid ending the year in a deficit.

Since districts are not allowed to have a deficit, Schenectady would have been forced to use its savings to fill the hole.

But school officials wanted to use that savings in the 2012-2013 budget.

So they borrowed a little more money than they had planned, and used some savings without properly showing that they had used it, instead of simply recording that they hadn’t gotten the money from the city.

Auditors were not impressed. Throughout the 71-page audit, they repeatedly referred to the issue. They gave the district a “qualified” audit with a “material weakness” — auditing code words for a serious problem.

They also said school officials refused to change their financial records to show that the city money was not received last year.

“We disagree with this policy,” they wrote.

Lewis admitted openly what the district had done.

“We booked it as revenue even though we didn’t get it,” she said. “We went in with eyes wide open.”

In the audit, school management wrote a letter defending the decision. School officials blamed the city for the problem.

“The Schenectady City School District has been placed in an extremely difficult position,” school officials wrote.

They said city officials decided not to pay in March — three months before the payment was due, and nearly a year after the budget that included the payment was created.

“With only three months remaining in the fiscal year, there was very little time for the District to alter in expenditures to offset such a substantial shortage in revenue,” school officials wrote.

They said they feared that they wouldn’t have enough money for the 2012-2013 budget if they admitted to using savings to cover the loss in revenue.

With a tax cap now in place, they said they couldn’t raise more money through taxes to cover the loss of savings.

So, they wrote, they decided that simply saying they’d gotten the money after all was the “most appropriate recourse.”

District officials also wrote that they decided the decision might keep Moody’s from lowering the district’s credit rating. A lower rating would require the district to pay much higher interest rates in new loans.

The problem will persist for the next 10 years, Lewis said.

That’s because the district budgeted again to receive the $3.4 million in 2013. So there will still be an unwritten deficit in the district’s books for the payment it did not receive in 2012.

Lewis said the district will cut costs or borrow $300,000 more each year until, eventually, the hole has been filled. The district’s other option would be to cut or raise $3.4 million at once, but Lewis said that could significantly hurt school programs. $300,000 is easier, she said.

“The impact isn’t as great as doing it all at once,” she said.

If the district receives $3 million in unpaid state aid for transportation, which the state withheld because the district improperly advertised for bids on transportation, that money might be used to fill most of the $3.4 million hole, she added.

“We might accelerate it,” she said.

She added that she’s confident she will get the city money in 2013.

“We expect this money. I have been assured of it,” she said.

Mayor Gary McCarthy has said the city will make the payment, which is in the proposed 2013 budget.

The district was also faulted in the audit for mistakes in handling the Contract for Excellence grant.

In 2008-2009, the district overspent that grant. Last year, the district did not separate the school costs connected to the grant, as required by the state.

District officials said they would follow the rules in the future.

“District officials did not believe the separate coding structure was required,” the auditors wrote in a corrective action plan. “District officials now understand their obligation and will take immediate steps to create a separate code structure to identify such costs for the 2012-2013 year.”