The New Suffolk Common School District maintained an excessive fund balance and therefore inappropriately levied its taxpayers for six school years, according to an audit released Monday by the New York State Comptroller’s Office. The district also exposed itself to liability from federal and state tax authorities by paying its former superintendent as an independent contractor for seven school years, according to the audit, which also found multiple deficiencies with the school’s accounting records and the performance of the district’s outgoing treasurer.
The audit — which was criticized by district officials at a recent school board meeting and in their written response to auditors — initially set out to evaluate financial operations in the New Suffolk district for three school years but was extended to better analyze budgeting practices, fund balance trends and reserve account balances, the audit summary states.
Auditors say they found the district, which educates pre-K through sixth-grade students, retained a fund balance that exceeded the permitted statutory limit by as much as $228,000 for each of the five school years from 2007 to 2012. State law requires that any fund balance in excess of 4 percent of the ensuing year’s budget must either be used to lower property taxes or be transferred to legally established reserve funds.
“Although the board president stated the unexpended surplus fund balance was for cash flow purposes, none of the adopted budgets included a planned balance as is permitted by law,” the audit reads.
District officials consistently collected more from taxpayers than was needed for budgeted appropriations over the years, because they included an additional amount in the tax levy for “General Fund Balance,” according to the audit. As a result of this practice, the audit states, the district collected at least $124,000 more from taxpayers over the five years than was needed.
District officials also failed to properly budget for tuition and teacher salaries, instead including money set aside from unofficial reserves in their budgets, the audit states. Even with the reserve funding, district officials still under-budgeted tuition payments to other districts by more than $150,000 and over-budgeted teacher salaries by more than $88,000 between 2008 and 2012, according to the audit.
“Currently, there is no authority under General Municipal or Education Law allowing the creation of a reserve for tuition or teacher salaries,” the audit reads.
Another section of the audit found that since his employment in August 2005, former part-time superintendent Bob Feger wasn’t paid through the district’s payroll system, but instead received his $26,520 annual salary payments through vendor disbursements.
The district issued checks to Mr. Feger each month, even though he did not submit payment vouchers to the district, the audit states. The audit also found that payments made by the district for Mr. Feger’s health care and dental insurance weren’t included on 1099-MISC forms the district filed.
New Suffolk school board president Tony Dill told auditors that amounts for Mr. Feger’s health benefits were not included because he collects Social Security and a pension, according to the audit. Mr. Feger’s pension and Social Security amounts would have been reduced had the amounts been reported to the IRS, the audit reads.
Auditors also took issue with how Mr. Feger’s 2011-12 salary was approved, noting that according to school board minutes, the board never approved his contract or salary. Instead, the audit states, Mr. Dill signed the agreement for his salary.
Mr. Dill told auditors that the board “simply approved [Mr. Feger’s] salary by adopting the annual budget, which includes the superintendent’s salary,” the audit reads.
Auditors also found that Mr. Feger was paid an additional $2,167 in compensation for the 2011-12 school year. The amount was not included in the employment agreement and the auditors found that the record for the payment was a note handwritten by treasurer Diana Foster that stated “final check for June 2012 at 2010/11 rate as negotiated,” according to the audit.
Though Mr. Dill explained that the check was for a missed payment for a month in a previous year, auditors said the district was “unable to provide any additional support for this explanation” and a review of the vendor history report throughout Mr. Feger’s employment “did not identify an unpaid month.”
The auditors concluded that although there was no statutory requirement that Mr. Feger be paid through the payroll system, the district did not withhold taxes from his earnings by compensating him through vendor disbursements.
Failing to withhold the taxes “could expose the district to liability from Federal and State tax authorities,” the audit states.
When contacted by phone Monday, Mr. Feger said he had properly reported his taxes on his own and that his Social Security payments were reduced as a result.
“I was paid as a contractor for that period of time and I did receive [more than] the allowable amount of income earned for Social Security,” he said in an interview.
Though he had not yet seen the audit report, Mr. Feger said the way he was paid was not unusual; the district had always paid superintendents as private contractors, he said.
“It was not something that I invented or that board invented,” he said. “It had always been done that way.”
Mr. Feger also said the auditors made no mention of the improper payment during a first audit during his time as superintendent.
“We complied to the letter with every recommendation they made,” he said. “I find it hard to believe that there could be anything significantly different in this audit than in the last one … during the first audit, nobody said a word about it.”
Mr. Feger said that, as a retired teacher, he could have “padded his pension and benefits” by being paid through the district’s payroll system. Since he was paid as a private contractor, his pension has remained level, he said.
“Probably, it would have worked to my advantage [to be paid through payroll] because my retirement would be larger now,” he said.
Mr. Feger also backed up Mr. Dill’s claim that the extra payment was due to a missed month. The former superintendent said he was paid on the first of each month for the previous month’s work but was never paid in September 2005, despite having worked through late August.
Last June, in the final month of his employment, he said he was paid twice: once on the first of the month for the work he completed in May and once at the end of the month for his employment in June.
Auditors recommended that the board “ensure that individuals who serve as officers or employees of the district be compensated through the payroll system,” and said the treasurer should “maintain relevant documentation” to make sure compensation is being paid correctly.
The audit also recommended that the school board should formalize each contract by a resolution and should “review the circumstances surrounding the extra $2,167 in compensation … and attempt to recover it, if appropriate.”
The audit was released five days after the district’s most recent Board of Education meeting, at which members discussed concerns about the way the draft report of the audit was written.
Superintendent Michael Comanda said district officials disagreed with some of the language and characterizations used in the report.
“We agree with the technical findings, and we have already begun to implement some of the recommended changes,” he said at Wednesday’s meeting. “We did, however, disagree a little with how the report was written.”
At the same meeting, the Board of Education accepted the resignation of longtime district treasurer Diana Foster, who was criticized in the audit. In a three-page letter in the final audit report, Mr. Comanda states the school board is currently in the process of interviewing candidates for the newly created position of school business administrator.
Mr. Dill said the audit made it clear a personnel change was necessary.
“I think what’s obvious in light of some of these technical findings is that she was essentially a bookkeeper and she did not have the training or the experience that would allow her to be fully cognizant of all of these technical aspects — I wasn’t aware of them, and I don’t think the rest of the board was,” he said. “It is easy for an outside group to blame the treasurer, but the reality is, they should blame all of us. We didn’t think most of it was applicable to us.”
Much of the rest of Mr. Comanda’s letter to the comptroller’s office deals with the superintendent’s concerns that the report describes the district’s budgeting practice as “lacking transparency” and implies “that the district has levied excessive and unnecessary taxes.”
Mr. Comanda said the method of budgeting the district has used for the past 10 years was created by a group of residents due to concerns over past budgeting practices in the district.
“Although we understand this format incorrectly labels some expense lines and fails to include the general fund balance, it is nevertheless viewed by our residents as something transparent and understandable,” Mr. Comanda wrote.
Mr. Dill, who prepares the school’s annual budget in his role as school board president, said the “critical thing” to consider when evaluating the report’s findings is that New Suffolk uses a budgeting system that’s different from those of most other school districts.
Ten years ago, at the request of district residents, the school changed its budgeting system from an appropriation-based system to an expense-based system — where each year’s budget is based off the actual expenses of the year prior — to help keep costs down.
“I think [residents] understand the way we handle the budget. Since we made the change we have had no problem passing the budget, even if it pierces the cap, because they seem to understand all this,” Mr. Dill said. “I think that because we are so small a district we can do some things that larger distracts can’t do, and I think some of that may have been outside the realm of [the auditors’] prior experience with other districts.”
Mr. Dill said issues with the disputed tax levy have to do with how the district labeled certain expenses in the budget, such as the “General Fund Balance” and a “Tuition Reserve,” which he said the district unknowingly labeled incorrectly.
“There are ways in which we label certain items that are not consistent with the rules and regulations,” Mr. Dill said. “When you really understand what’s going on here it’s very technical stuff. They are not saying, ‘No you had no business spending that money,’ they are saying, ‘No, you shouldn’t have called it this.’
“What they are criticizing us for, it is all legitimate, but it is all extremely technical. When you get through it all it makes essentially no difference overall in terms of the bottom line,” Mr. Dill continued. “In the final analysis, all we would have to do to fix this — all these technical things — is re-label a bunch of lines that they object to what we call it … We can do all of these changes very easily and without changing [the system] the district asked to vote on.”
Mr. Comanda explains in his letter that while the district understands what it did was “technically incorrect,” the tax rate would have remained the same had the district followed proper procedures.
“We believe the implication that our public has been overtaxed can be very misleading to a lay person.” Mr. Comanda wrote. “While from an accounting view the rate may have been incorrectly calculated, from an actual expense view the rate was necessary to fund that year’s operations.”