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Division of LocaL Government & schooL accountabiLity

o f f i c e o f t h e n e w y o r k s t a t e c o m p t r o L L e r

report of ExaminationPeriod Covered:

July 1, 2013 — May 8, 2015

2015M-318

Ithaca City School DistrictFinancial Condition

thomas p. Dinapoli

Page

AUTHORITY LETTER 1

INTRODUCTION 2 Background 2 Objective 2 Scope and Methodology 2 CommentsofDistrictOfficialsandCorrectiveAction 3

FINANCIAL CONDITION 4 Recommendation 6

APPENDIX A ResponseFromDistrictOfficials 7APPENDIX B AuditMethodologyandStandards 9APPENDIX C HowtoObtainAdditionalCopiesoftheReport 10APPENDIX D LocalRegionalOfficeListing 11

Table of Contents

11Division of LocaL Government anD schooL accountabiLity

State of New YorkOffice of the State Comptroller

Division of Local Governmentand School Accountability February2016

DearDistrictOfficials:

AtoppriorityoftheOfficeoftheStateComptrolleristohelpschooldistrictofficialsmanagetheirdistrictsefficientlyandeffectivelyand,bysodoing,provideaccountabilityfor taxdollarsspent tosupportdistrictoperations.TheComptrolleroverseesthefiscalaffairsofdistrictsstatewide,aswellasdistricts’compliancewithrelevantstatutesandobservanceofgoodbusinesspractices.Thisfiscaloversight is accomplished, in part, throughour audits,which identify opportunities for improvingdistrictoperationsandBoardofEducationgovernance.Auditsalsocanidentifystrategiestoreducedistrict costs and to strengthen controls intended to safeguard district assets.

Following is a reportofour auditof the IthacaCitySchoolDistrict, entitledFinancialCondition.This auditwas conducted pursuant toArticleV, Section 1 of theStateConstitution and theStateComptroller’sauthorityassetforthinArticle3oftheNewYorkStateGeneralMunicipalLaw.

This audit’s results and recommendations are resources for district officials to use in effectivelymanagingoperationsandinmeetingtheexpectationsoftheirconstituents.Ifyouhavequestionsaboutthisreport,pleasefeelfreetocontactthelocalregionalofficeforyourcounty,aslistedattheendofthis report.

Respectfullysubmitted,

Office of the State ComptrollerDivision of Local Governmentand School Accountability

State of New YorkOffice of the State Comptroller

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Background

Introduction

Objective

Scope andMethodology

The Ithaca City School District (District) is located in the City of Ithaca and encompasses eight towns in Tompkins County and two towns in Tioga County. The District is governed by the Board of Education(Board),whichiscomposedofnineelectedmembers.TheBoard is responsible for the general management and control of the District’s financial and educational affairs. The Superintendent ofSchools(Superintendent)istheDistrict’schiefexecutiveofficerandisresponsible,alongwithotheradministrativestaff,fortheDistrict’sday-to-day management under the Board’s direction. The District’s ChiefOperationsOfficerplaysakeyroleinthebudgetdevelopmentprocessandthedailyBusinessOfficeadministration.TheDistrict’sbudgetedappropriationsforthe2015-16fiscalyearwere$115million,whichwerefundedprimarilywithStateaidandrealpropertytaxes.

The District differs from the rural school districts of Tompkins County and most of the Southern Tier region. With its student population of 5,166,itismorethanthreetimeslargerthanthenextbiggestschooldistrict inTompkinsCounty (theDrydenCentral SchoolDistrict),and with a combined wealth ratio1of1.175,itis15percentwealthierthan the next wealthiest district (Lansing), and more than doublesome of the others. The District compares favorably on a number of wealth,povertyandtaxbaseindicatorswithbothitsneighborsandother similarly-sized upstate city school districts. This appears to be the case despite an unusually high percentage of its property being exemptfrompropertytaxes.2

The objective of our audit was to examine theDistrict’s financialactivities.Ourauditaddressedthefollowingrelatedquestion:

• DidDistrictofficialsproperlymanagefundbalance?

WeexaminedtheDistrict’sbudgetingpracticesandtheuseoffundbalanceandreservefundsfortheperiodJuly1,2013throughMay8,2015.ToanalyzetheDistrict’sfinancialconditionandbudgetingtrends,weextendedourauditscopebacktothe2010-11fiscalyearandforwardthroughJune30,2015.

1 Ameasureofincomeandpropertywealthwithinadistrict(benchmarkedagainsta statewide average of 1.000).The higher a district's ratio, themore credit itreceives in the socioeconomic climate formula.

2 TheCityandTownofIthacabothhavesomeof thehighestpercentageof taxexemptpropertiesinNewYorkState,primarilyduetoCornellUniversity’sandIthaca College’s locations within their boundaries.

33Division of LocaL Government anD schooL accountabiLity

Comments ofDistrict Officials andCorrective Action

We conducted our audit in accordance with generally accepted governmentauditingstandards(GAGAS).Moreinformationonsuchstandards and the methodology used in performing this audit are includedinAppendixBofthisreport.

The results of our audit and recommendations have been discussed withDistrictofficials,andtheircomments,whichappearinAppendixA, have been considered in preparing this report.District officialsagreed with our recommendation and indicated they plan to initiate corrective action.

The Board has the responsibility to initiate corrective action. Pursuant toSection 35 ofGeneralMunicipalLaw,Section 2116-a(3)(c)ofNewYorkStateEducationLawandSection170.12oftheRegulationsoftheCommissionerofEducation,awrittencorrectiveactionplan(CAP)thataddressesthefindingsandrecommendationsinthisreportmustbepreparedandprovidedtoourofficewithin90days,withacopyforwardedtotheCommissionerofEducation.Totheextentpracticable,implementationoftheCAPmustshouldbeginbytheendofthenextfiscalyear.FormoreinformationonpreparingandfilingyourCAP,pleaserefertoourbrochure,Responding to an OSC Audit Report,whichyou receivedwith thedraft audit report.TheBoardshouldmaketheCAPavailableforpublicreviewintheDistrictClerk’soffice.

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Financial Condition

Fundbalancerepresentsresourcesremainingfrompriorfiscalyearsthatcanbeusedtolowerrealpropertytaxesfortheensuingfiscalyear.NewYorkStateRealPropertyTaxLawcurrentlyallowsadistricttoretain fund balance in the amount of 4 percent of the ensuing year’s appropriations.Whenmaintainedatreasonablelevels,fundbalanceprovidesacushionforunexpectedfluctuationsinoperations,assistswith cash flow fluctuations and can be used to help finance thenextyear’soperations. It is essential thatDistrict officialsdevelopreasonable, structurally balanced3 budgets to balance recurring expenditure needs with recurring revenue sources. The adoptedbudgets also should provide desired services on a continuing basis and manage fund balance responsibly.

Prior to fiscal year 2011-12, theDistrict built up fund balance byadoptingconservativebudgets.Attheendoffiscalyear2010-11,theDistrict’sunrestrictedfundbalancewas$7.3millionor7percentoftheensuingyear’sappropriations.Whilethisamountwasinexcessofthestatutorylimit,theDistricthadtorelyonittofundbudgetgapswhenitbegantoexperiencefinancialchallenges.Beginninginfiscalyear2011-12,expendituresbegantooutpacerevenues,asindicatedinFigure1,andtheDistrictbeganincurringoperatingdeficits.

3 Structurallybalancedbudgetsincludetaxleviesthatequalthedifferencebetweennon-taxrecurringrevenuesandrecurringexpenditures.

Figure 1: Revenues and Expenditures

$80

$85

$90

$95

$100

$105

$110

$115

2010‐11 2011‐12 2012‐13 2013‐14 2014‐15

Millions

Revenues Expenditures

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TheDistrict’sdeficits,averaging$4.7millionfromfiscalyears2011-12through2013-14,increasedasexpenditurescontinuedtoincreaseby9percentduringthesametime.Theexpenditureincreaseswereprimarilydrivenbyemployee-relatedbenefits,whichincreasedby26percentfromfiscalyears2011-12through2013-14.Duringthesametime, theDistrict’s total revenues increasedby4percent andwerenot sufficient to fund the expenditure increases. For example, theDistrict’samountofStateaidreceivedremainedrelativelyflataftera9percentdecreasein2010-11.Inaddition,therealpropertytaxcapwasimplementedin2012,limitingtheannualamountofincreaseintherealpropertytaxlevytheDistrictcouldbudgetfor.4 Intotal,thesetwo revenue sources consistently comprisedmore than 92 percentoftheDistrict’sexpendituresfrom2010-11.Asaresult,theDistrictincreaseditsuseoffundbalancetosupportoperatingexpenditures,andtotalfundbalancewassignificantlyreducedby$13.1millionor54percentfromfiscalyears2010-11through2014-15,asindicatedin Figure 2.

$0

$5,000,000

$10,000,000

$15,000,000

$20,000,000

$25,000,000

$30,000,000

2010‐11 2011‐12 2012‐13 2013‐14 2014‐15

Reserves Unreserved

Figure 2: Fund Balance Trend 2010 - 2015

Districtofficialsrecognizedtheiruseoffundbalanceasafinancingsourcecouldnotcontinue.AlthoughnosingleactionoreventhelpedDistrictofficialsdevelopbetterbudgets,theDistrictdidachievesomecostsavingswhichremovedcertainoperatingexpendituresfromitsbudget. Specifically, from fiscal years 2013-14 through 2014-15,the District saved $3 million5 by reducing staff through attrition and position consolidation. The District also moved information technologyservicestoitsBoardofCooperativeEducationalServices,

4 Thetaxcaplimitsalocalgovernment’staxlevyincreasetothelesseroftherateofinflationor2percentwithsomeexceptions,includingaprovisionthatallowslocal governments to override the cap.

5 Thisfigureincludessalariesandestimatedbenefits.

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Recommendation

realizingasavingsof$664,000from2013-14through2014-15.Bothof these cost savings measures are positive steps in the effort to use recurringrevenuestosupportrecurringexpenditures.

Toavoidpotentialfiscalstress,forthe2014-15fiscalyear,theBoardadoptedabudgetfundedwitha9percentincreaseintherealpropertytaxlevy.Thisbudgetrequiredanoverrideoftherealpropertytaxcapby the District’s residents. The voters approved the budget and the District’s operations generated a small surplus of less than 1 percent ofitsexpenditures.ThisrealpropertytaxincreasehelpedaligntheDistrict’soperatingexpenditureswitharecurringrevenuesource.WealsoreviewedtheDistrict’s2015-16adoptedbudgetanddeterminedthatrevenueandexpenditureestimateswerereasonable.

We commendDistrict officials for taking positive steps to budgetresponsiblyduringfinanciallychallengingtimes. Districtofficialsshould:

1. ContinuetoexaminecostsavingsopportunitiestofurtheraidtheDistrictinfundingrecurringexpenditureswithrecurringrevenues.

77Division of LocaL Government anD schooL accountabiLity

APPENDIX A

RESPONSE FROM DISTRICT OFFICIALS

TheDistrictofficials’responsetothisauditcanbefoundonthefollowingpage.

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99Division of LocaL Government anD schooL accountabiLity

APPENDIX B

AUDIT METHODOLOGY AND STANDARDS

OuroverallgoalwastoexaminetheDistrict’sfinancialconditionanddetermineifDistrictofficialsestablishedstructurallybalancedbudgets.Weexaminedfinancialrecordsandreportsandannualauditreports.WealsointerviewedDistrictofficialsandconductedabudgetanalysisforthegeneralfundfromJuly1,2013throughJune30,2015.WeextendedourscopebacktoJuly1,2010andforwardtoJune30,2015fortrendanalysis.Wealsoperformedthefollowingprocedures:

• WeinterviewedDistrictofficialstogainanunderstandingofthebudgetingprocess,includingtherationalefordeterminingtheamountofunexpendedsurplusfundsavailableforappropriation.

• We compared the general fund estimated revenues and budgeted appropriations with actual revenues and expenditures for fiscal years 2012-13 through 2014-15 to determine if theDistrict’s budget estimates were reasonable.

• WecalculatedthedeclineinfundbalanceandinreservesfromJune30,2011throughJune30,2015,andtheoperatingdeficitforfiscalyearsendingJune30,2011throughJune30,2015.

• WecalculatedtheamountofrecurringrevenuesversusrecurringexpenditurestodetermineiftheDistrictwasfundingoperatingexpenditureswithfundbalance.

• We determined the amount of cost savings the District realized by reducing the number of staff and moving information technology services to the Board of Cooperative Educational Services Regional Information Center.

• Wereviewedadoptedbudgetsforfiscalyears2012-13through2015-16todeterminethetaxlevy increases proposed.

• We calculated the unreserved fund balance as a percentage of the ensuing year’s budgeted appropriationsfromfiscalyears2010-11through2014-15.

• Wedeterminedthetrendinrevenuesandexpendituresforfiscalyears2010-11through2014-15.

WeconductedthisperformanceauditinaccordancewithGAGAS.Thosestandardsrequirethatweplanandperform theaudit toobtainsufficient,appropriateevidence toprovidea reasonablebasisforourfindingsandconclusionsbasedonourauditobjective.Webelievethattheevidenceobtainedprovidesareasonablebasisforourfindingsandconclusionsbasedonourauditobjective.

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APPENDIX C

HOW TO OBTAIN ADDITIONAL COPIES OF THE REPORT

OfficeoftheStateComptrollerPublicInformationOffice110StateStreet,15thFloorAlbany,NewYork12236(518)474-4015http://www.osc.state.ny.us/localgov/

Toobtaincopiesofthisreport,writeorvisitourwebpage:

1111Division of LocaL Government anD schooL accountabiLity

APPENDIX DOFFICE OF THE STATE COMPTROLLER

DIVISION OF LOCAL GOVERNMENTAND SCHOOL ACCOUNTABILITYAndrewA.SanFilippo,ExecutiveDeputyComptroller

GabrielF.Deyo,DeputyComptrollerTraceyHitchenBoyd,AssistantComptroller

LOCAL REGIONAL OFFICE LISTING

BINGHAMTON REGIONAL OFFICEH.ToddEames,ChiefExaminerOfficeoftheStateComptrollerStateOfficeBuilding,Suite170244 Hawley StreetBinghamton,NewYork13901-4417(607)721-8306Fax(607)721-8313Email:Muni-Binghamton@osc.state.ny.us

Serving:Broome,Chenango,Cortland,Delaware,Otsego,Schoharie,Sullivan,Tioga,TompkinsCounties

BUFFALO REGIONAL OFFICEJeffreyD.Mazula,ChiefExaminerOfficeoftheStateComptroller295MainStreet,Suite1032Buffalo,NewYork14203-2510(716)847-3647Fax(716)847-3643Email:Muni-Buffalo@osc.state.ny.us

Serving:Allegany,Cattaraugus,Chautauqua,Erie,Genesee,Niagara,Orleans,WyomingCounties

GLENS FALLS REGIONAL OFFICEJeffreyP.Leonard,ChiefExaminerOfficeoftheStateComptrollerOne Broad Street PlazaGlensFalls,NewYork12801-4396(518)793-0057Fax(518)793-5797Email:Muni-GlensFalls@osc.state.ny.us

Serving:Albany,Clinton,Essex,Franklin,Fulton,Hamilton,Montgomery,Rensselaer,Saratoga,Schenectady,Warren,WashingtonCounties

HAUPPAUGE REGIONAL OFFICEIraMcCracken,ChiefExaminerOfficeoftheStateComptrollerNYSOfficeBuilding,Room3A10250VeteransMemorialHighwayHauppauge,NewYork11788-5533(631)952-6534Fax(631)952-6530Email:Muni-Hauppauge@osc.state.ny.us

Serving:NassauandSuffolkCounties

NEWBURGH REGIONAL OFFICETennehBlamah,ChiefExaminerOfficeoftheStateComptroller33AirportCenterDrive,Suite103NewWindsor,NewYork12553-4725(845)567-0858Fax(845)567-0080Email:Muni-Newburgh@osc.state.ny.us

Serving:Columbia,Dutchess,Greene,Orange,Putnam,Rockland,Ulster,WestchesterCounties

ROCHESTER REGIONAL OFFICEEdwardV.Grant,Jr.,ChiefExaminerOfficeoftheStateComptrollerThe Powers Building16WestMainStreet,Suite522Rochester,NewYork14614-1608(585)454-2460Fax(585)454-3545Email:Muni-Rochester@osc.state.ny.us

Serving:Cayuga,Chemung,Livingston,Monroe,Ontario,Schuyler,Seneca,Steuben,Wayne,YatesCounties

SYRACUSE REGIONAL OFFICERebeccaWilcox,ChiefExaminerOfficeoftheStateComptrollerStateOfficeBuilding,Room409333E.WashingtonStreetSyracuse,NewYork13202-1428(315)428-4192Fax(315)426-2119Email:Muni-Syracuse@osc.state.ny.us

Serving:Herkimer,Jefferson,Lewis,Madison,Oneida,Onondaga,Oswego,St.LawrenceCounties

STATEWIDE AUDITSAnnC.Singer,ChiefExaminerStateOfficeBuilding,Suite170244 Hawley Street Binghamton,NewYork13901-4417(607)721-8306Fax(607)721-8313