LONG ISLAND WEEKLY DESK
Schools Find Spare Change in the Cushions
By FAIZA AKHTAR, NY TIMES, November 6, 2005

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A SURPRISE surplus of $2.8 million in North Babylon. A sudden $4 million shortfall in South Country. Weak procedures and undocumented expense claims in Manhasset. Budgets cut $1.7 million too far in Seaford.
Every week seems to bring news of another school district on Long Island where a significant gap has opened up between the budget, the books and financial reality.

Some of the headlines are emerging from audits by the state comptroller's office, which is checking on 26 Island districts after scandals in the Roslyn and William Floyd districts. Others are being turned up by districts themselves, or by new accountants trying to untangle the work of Miller, Lilly & Pearce, the defunct auditing firm implicated in the Roslyn mess and elsewhere.

But though the headlines haven't all been bad -- East Islip, for example, got a nearly spotless audit report from the comptroller -- they have raised fresh concerns in voters' minds about just how far any district's numbers can be trusted.

Specifically, recent cases have shined a spotlight on a common but little-publicized practice: Building hidden cushions into some parts of a school budget to shield the district against unexpected costs.

School officials say they have little choice, because state law allows them to allocate only 2 percent of their annual budgets to contingency funds -- too little, they say, to cope with problems like the recent sharp increases in energy costs.

'The idea of a 2 percent balance in reserves is insufficient, in our view,' said David Ernst, spokesman for the New York State School Boards Association, an advocacy group for public schools. 'Most government organizations have far more than that.'

School officials on the Island echoed Mr. Ernst's view, saying that districts need leeway to keep money aside and move it around to defray unexpected costs without putting the district into deficit.

Elizabeth Schmale, assistant superintendent for business operations for the Longwood schools, said that her district budgeted for a 10 percent increase in fuel-oil costs this year but that prices rose much more.

'Now we have to look into another area in the budget where the cost is not as high as we anticipated and pull funds from there,' she said. 'If that doesn't work, then we might start to slow down the spending districtwide.'

That kind of flexibility is vital to a district's fiscal health, said Ernest Smith, a forensic accountant and partner at Callaghan Nawrocki, a Melville accounting firm that handles some school districts.

'It's like your own personal budget for home: you need to estimate conservatively and set money aside for emergencies,' he said. 'But because the 2 percent is not a realistic amount, either for a household or a district, you will see schools putting in some kind of cushion for budget items, without announcing it.'

When voters cast their ballots on a school budget each May, they are passing judgment only on the overall spending total, not on the individual items making up the budget, Mr. Smith said. School officials are allowed considerable discretion in the details of budgeting and cost estimates, and many choose for tactical reasons to keep mum about the cushions concealed in their budgets.

'Sometimes it is difficult for taxpayers to see a budget as an estimate and not an exact science,' said Donna Jones, director of business services for the Brentwood school district. 'Other times, it is a negotiation strategy we use against the unions, to not tell the community that there is a specific line where you are sheltering dollars. If you do announce it publicly, the union negotiator, who is already combing through our budget, will have the ammunition to know how much we can give.'

In recent years, with voters giving more scrutiny to their tax bills and the school budgets behind them, openness has become a central issue.

Randy Kokut of Hicksville, a manager at an engineering and surveying firm, said the idea that school districts may deliberately allocate extra money to some budget items was a rude surprise to her. As a concerned parent, she said, 'I have sat through all those budget meetings, and I never heard anyone mention the idea of a cushion before.'

Ms. Kokut said she had always voted in favor of school budgets and probably would have done so anyway, even if she had been aware of cushioning in the budgets. Still, she said, 'if I am paying for all of the items in the budget with my taxes, then I deserve to get more information, not less.'

Some districts are bringing the practice into the open. Ken Cerini, president of the Suffolk chapter of the New York State Society of Certified Public Accountants, said of the five districts his firm audits, one has created a new 'additional appropriations' budget line, allowing other spending to be estimated more accurately without hidden cushioning.

Mr. Ernst of the statewide board group warned that it was possible to take transparency too far. 'Districts should give everyone a summary, and are required to make additional information available,' he said. 'But if we force all these details on everyone, then we are not aiding public understanding, something that all districts are required to do.'

Still, Joseph Dwyer, a retired police officer in Floral Park, said he preferred as much information as possible from the school district before voting on a budget. 'You get a truer picture of where your money is going,' he said.

The truth of the picture that school boards get from their accountants remains a focus for concern, nearly a year after the collapse of Miller, Lilly. The million-dollar discrepancies that appeared in South Country and North Babylon last month were both traced to errors by the firm, which, before it collapsed, was auditor for 50 of the Island's 124 school districts.

One of the accounting firms that took over many of Miller, Lilly's former district accounts is Coughlin, Foundotos, Cullen & Danowski of Port Jefferson Station. The firm, which now handles 60 districts on Long Island, was recently criticized for poor oversight and conflicts of interest by State Comptroller Alan G. Hevesi after audits of the Lawrence and East Islip districts.

Mr. Hevesi's office referred its findings to the State Board of Public Accountancy for further investigation. Calls to Coughlin, Foundotos seeking comment were not returned.

John Bohr, a Bohemia resident, said he believes there should be a limit on how many districts an accounting firm should audit. 'If you have a firm out there that is auditing the majority of the districts on Long Island again,' he said, 'I can see another Miller, Lilly & Pearce fiasco happening all over again.'

Two letters in response to this article point to the systemic problems that plague government accounting of public money:

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November 13, 2005
Long Island
Money Management and School Budgets (2 Letters)
To the Editor:

Alas, "Schools Find Spare Change in the Cushions" (Nov. 6) has exposed us practicing and retired school business officials who have the talent to create deficit-proof budgets; failure to do so used to spell the end of a career in this area. However, the surprise fund surpluses and deficits are symptomatic of a far more serious problem.

I submit that in most cases, we have educators and civil service managers managing the business end of multi-million-dollar school systems with little or no education or training in basic finance, economics and business management. In 1973, Assemblyman I. William Bianchi Jr. introduced legislation that he and I wrote requiring course work in these areas for obtaining administrative certification specifically for a school business official. Our bill was summarily dismissed, probably at the behest of the "education fraternity."

On behalf of severely strained taxpayers and beleaguered public school districts, I would urge the Legislature to examine this specific area of public school administration with the view of strengthening certification requirements.

Wesley F. Springhorn Jr.
Bellport
The writer is a former assistant superintendent of business affairs.

To the Editor:

"Schools Find Spare Change in the Cushions" did not mention that the law limiting school district balances costs taxpayers a lot of money. (The article's headline distracts from the real problem.) Districts get the bulk of their revenues in the second half of the fiscal year, particularly in Suffolk County, where property taxes are collected only twice a year. With a 2 percent year-end balance restriction, districts are forced to borrow for cash flow purposes and pay substantial interest costs.

Given the narrow fund balance restriction, if districts did not budget conservatively, they could too easily fall into a deficit position, thereby jeopardizing their standing in the credit markets on which they so heavily rely for cash flow needs.

Without a fuller explanation of the 2 percent restriction, residents are apt to view the school fiscal practices as a "rude surprise." If more people understood how restrictive and costly the law is, we would instead hear people clamoring for legislative reforms.

Patricia McGuigan
Setauket
The writer is a former vice president in public finance, Moody's Investors Service.

The accounting fraud we hear about frequently in the news is no surprise to Larry Fisher, a winner of the "'A' For Accountability Award, and a founder of Taxpayers for Government Accounting Reform.

Diogenes magazine

Accounting Education Reform Must Begin in High Schools, Says Top Educator

As Larry Fisher, a founder of Taxpayers for Government Accounting Reform, says, "I have come to the realization that the government's accounting and financial systems were never designed to work." (Diogenes magazine, p. 12).

Planned failure of accounting means that there cannot be accountability.