Wednesday, May 16, 2012

TPS management letter more troubling than audit report

Toledo Public Schools is seeking a new 6.9 mill levy - a permanent levy that will be on your property taxes forever.

Yesterday, I shared with you the troubling findings from TPS's most recent financial audit. There were 18 different citations for non-compliance, material deficiencies and significant deficiencies ranging from failing to verify student eligibility for school lunches to overpayment of severance that was ordered to be recovered.

Audits contain a lot of good information detailing how well - or poorly - the school is doing with our tax dollars. But I've always found that the management letter accompanying the audit contains the best information. Management letters are public records, but are not included with the audit on the State Auditor website. So I asked for, and received, the management letter that was sent along with the 2011 audit for TPS.

As the letter explains:

These comments reflect matters that do not require inclusion in the reports Government Auditing Standards or Office of Management and Budget Circular A-133 require. Nevertheless, these comments represent matters for which we believe improvements in compliance or internal controls or operational efficiencies might be achieved. Due to the limited nature of our audit, we have not fully assessed the cost-benefit relationship of implementing these recommendations.

The letter starts with personnel files and their management, detailing the requirements of the Ohio Revised Code.

The District does not have a formal policy or established controls in place, which are consistent with the aforementioned requirements. Lack of a formal policy and established controls over the storage, use and distribution of personal information, could result in lost, stolen and/or compromised personal information. We recommend the District establish a formal policy and system of controls over the storage, use and distribution of personal information, consistent with Ohio Revised Code.

It could be that, as part of the audit, they found there wasn't a policy and controls so they're recommending the district implement such. Or, it could mean that they found personnel information had been used or distributed in a manner inconsistent with the ORC. The only way to determine which of these was the cause of the recommendation would be to ask a board member or the superintendent and count on them to be as forthcoming as to answer the question. If, though, it was an inappropriate use of the information, there could be legal ramifications.

I would suggest the following questions:

* Since the management letter for the last audit mentions creating a formal policy and establishing controls over the storage, use and distribution of personnel information, I would like to know if there have been any incidences when personnel information was used, distributed or accessed in ways that are inconsistent with the Ohio Revised Code.

* If so, when did this happen, what files were accessed and what was the inappropriate use?

* If so, were employees notified of the incident?

* Have there been any disciplinary actions, counselling or re-training of employees who have access to the personnel files and, if so, what was the purpose of such?

The letter recommends TPS list the reason for going into executive session in the minutes. Despite the fact that all public officials are required to participate in training and they should know this, it appears they've not been following the law - and that in approving the minutes of their prior meetings, they failed to realize the reason for their executive sessions was not being recorded. Who, exactly, was making the motion to go into executive session and why didn't that person care enough to verify that their motion, including the reason, was recorded properly in the minutes?

I guess it's a good thing that Ohio's mandatory public records and open meetings law training is taking place at TPS in June.

In the audit, TPS was cited for not checking the federal Excluded Parties List System before awarding contracts to be sure that contracts and purchase orders weren't going to people on the list (Finding 2011-013). This was a material weakness because it could result in a loss of federal funds. Evidently, they don't check the state database, either.

Ohio Revised Code 9.24 prohibits using any state funds for any contract with a person or entity who has a finding for recovery in Ohio still outstanding. To help entities comply with the law, Ohio created a database (in 2004!) listing all individuals with findings. TPS didn't do this, so the management letter recommends they start doing it - and keep a record to show that they have checked the list prior to awarding contracts.

The Code of Federal Regulations (CFR) imposes standards for financial management systems. One section requires entities that receive federal monies to quickly disburse them - usually within 30 days. The management letter states:

When determining that funds are being expended within the period of time for which they were requested, we found that system reports were not always available to support the data reported in the Project Cash Request.

The District did not establish procedures to minimize the time between the receipt and disbursement of IDEA Part B Special Education Funds, resulting in two of the seven Project Cash Requests tested not being spent down within a reasonable time frame, generally 30 days.

Again, the potential consequence is loss of federal funds.

Ohio law says that no entity can expend funds unless they are first appropriated. These seems to make sense to most people, but apparently is being overlooked at TPS.

The audit showed that TPS spent $7,923 out of their general fund that hadn't been appropriated by the board. A small amount, you might think, that could be attributed to a paperwork snafu.

But they also spent $48,101 out of the School Facilities Maintenance Fund without first appropriating it. Again, perhaps just a paperwork issue.

But when they spent $1,824,800 out of the Permanent Fund without appropriating it, you've got a problem with spending without board action.

The recommendation in this case is obvious: implement procedures to be sure you're not breaking Ohio law.

TPS doesn't just have to be sure that money isn't spent without being appropriated, they also have to be sure that their appropriations don't exceed the amount available. The management letter states:

Ohio Rev. Code, Section 5705.39, requires that total appropriations from each fund shall not exceed the total estimated resources and that no appropriation measure is effective until the county auditor files a certificate that the total appropriations from each fund do not exceed the total official estimate or amended official estimate.

The District’s appropriations have exceeded total available for appropriations for the Adult Education Fund by $518,647, the Auxiliary Service Fund by $378,266, and the Title I Fund by $2,832,809.

Really? $3.7 million that they appropriated without first ensuring they had the funds? Maybe they *knew* they had the funds, but hadn't yet changed their revenue estimates. If that's the case, then it's sloppy bookkeeping on their part. Of course, it could be that they just weren't paying attention or they didn't have the money and had to scramble to find it when they realized what they'd done. Regardless, it doesn't inspire confidence that they're going to manage even more money efficiently, effectively or even in compliance with the law.

Service Organization Controls (SOC) Statement 1, which used to be known as the Statement of Auditing Standards, is required of various organizations provided services like health and other insurances. The management letter cites the district for failing to review these SOC 1 reports to be sure that ineligible employees are not being covered or that ineligible charges are not being paid. They recommend that TPS put into place reviews and controls sufficient identify and address incomplete or inaccurate claims payments.

Project Cash Requests (PCR) are processes by which TPS asks for and receives funds from the Ohio Department of Education (ODE). The funds are supposed to be expended in the month they are requested. Reports from TPS to ODE did not contain the required PCRs. The management letter notes that, even though the cash requests were approved by ODE with the necessary documentation, TPS still has an obligation to comply with the Cash Management Act.

Finding 2011-007 in the audit cited TPS for a lack of physical inventory since 2002, despite the board requirement that one be conducted every five years. The management letter cited issues with the equipment listings from the Title I and Special Education programs. Both lists were missing pertinent information.

Audit Finding 2011-15 cited a Material Weakness and Non-Compliance in the Child Nutrition Program because TPS wasn't keeping track of which eligible student was actually getting a free or reduced meal. The management letter goes into more details with the problems TPS is having with this program.

The District is reimbursed by the Federal government for lunch and breakfast meals served within the District. Reimbursements received from the Federal government are based upon amounts claimed to the State through monthly site claim forms. The District will only be reimbursed for meals that do not exceed the number of eligible students in a school multiplied by the monthly attendance rate of that school.

Four percent of transactions tested, the number of students eligible for free and reduced meals was less than what was actually eligible. This was the result of the District erroneously applying the attendance rate to the number of eligible students. On another occasion, the District reported 9 more children then eligible. This resulted in the District being reimbursed for more meals than eligible

They also had a problem with issuing refunds to students who pre-pay and then leave the district:

The District collects money from students for lunch and breakfast meals. Students are permitted to prepay for lunches. When a student leaves the District, the student is sometimes due a refund of money for the balance of the prepayment.

The District has not established any formalized policies and procedures to document who is responsible for determining refunds and what documentation is required to support the refund.

Failure for the District to establish policies and procedures over refunds could result in misappropriation or theft of food service monies.

We recommend the District establish policies and procedures that identify who is responsible for determining refunds and what documentation is required to support the refund. Documentation should include receipt dates and amounts, the total amount applied to meals received, and any remaining balances.

This is the first half of the 14-page letter. I'll review the rest of the management letter tomorrow.

These are the issues the auditor found with how TPS is managing our tax dollars. Remember this as board members and politicians tell you we need to give them even more money.

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