Board members play an essential role in ensuring the financial integrity of the school district or charter school. Your vigilance on financial matters can translate into student achievement when public funds are spent prudently and effectively. Good policies can play an important role in ensuring financial integrity, and keep your schools running smoothly.
There are eight policy topics that directly affect a school district’s financial integrity. They are:
- Approving expenditures and payroll
- Understanding the annual audit
- Finance and goal setting
- Preparing the budget
- Limiting wasteful or excessive spending
- The role of the Finance Committee
- Transfers of funds
- Code of Ethics
Approving reports, expenditures and payroll
At each board meeting, there is likely to be an item on the agenda that reads “approve the report of the board secretary/business administrator” or something similar. Board members will want to examine the board secretary’s report in detail. If the board also employs a “Treasurer of School Moneys” pursuant to N.J.S.A. 18A:17-31 to 36, there will also be a Treasurer’s Report. The board will want to be sure the reports agree and have been independently arrived at. In addition, the board should make sure that no major funding line has been over-expended and that there are sufficient funds projected for operations until the end of the fiscal year.
Also at each board meeting, there is likely to be an item on the agenda to “approve the bills list,” or the equivalent. It can consume a tremendous amount of time to look over each expenditure and to ask questions about individual items. Yet this is an essential function. Some school boards have a Finance Committee that studies the list and makes recommendations to the full board. Having a good working relationship with the business administrator can expedite this function.
Approving payroll is another essential board function in this category. Depending on what costs are covered under this category (salary alone, or also benefits including health care), payroll can account for as much as 75 percent of district expenditures.
Have you ever wondered what exactly the board secretary/business administrator does? The Policy Unit at NJSBA can provide a model job description that lays out the responsibilities of this important school official.
Understanding the Annual Audit
N.J.S.A. 18A:23-1 et seq. is the state law on school audits and auditors. A properly licensed auditor must be employed by the school board to conduct the required annual audit for a fee established by the board. The audit shall be completed within five months (prior to 2010, the limit was four months) after the end of the school fiscal year. The audit will include a verification of all cash and bank balances, including money derived from athletic events.
The audit does not necessarily examine every separate expenditure, but is based on a sample that is intended to detect financial irregularities and reveal faulty business practices that could lead to irregularities. A “clean” audit is the goal, with no “findings and recommendations.” However the auditors’ findings and recommendations can be valuable in identifying problems at an early stage, when the problems can be corrected without major costs or inadvertent illegal actions. State law requires that the auditors’ recommendations, if any, be included in the audit report.
Within 30 days of receiving the audit report, the board of education must discuss the recommendations of the audit at a regularly scheduled public meeting (N.J.A.C. 18A:23-5). The discussion will be noted in the minutes of the meeting. The board will direct the implementation of the auditor’s recommendations.
With the change of elections to November for most boards (and most new board members now being sworn in during early January), it is likely that new board members will be introduced to their auditors in January, at one of their first meetings. This is a change from the previous long-standing timetable. Previously, new board members were participating in financial decision-making for many months – April to December – before the audit was received and discussed.
The audit usually comes in two documents. The Auditor’s Management Report, typically the thinner document, is subdivided into approximately 30 sections. The report contains findings, exceptions, discrepancies, questionable costs, and conclusions on various items. For example, the report examines whether reimbursement claims were submitted and certified in a timely way. Board members may want to pay special attention to key numbers and calculations in the report, such as fund balance at the end of the previous fiscal year; calculation of excess surplus (above 2 percent); and bid thresholds ($36,000 with a qualified purchasing agent and $26,000 without a qualified purchasing agent).
The second, thicker document is the Comprehensive Annual Financial Report (CAFR). The CAFR contains an abundance of data including basic financial statements, detailed budgetary information, internal controls and financial trends.
Board members should plunge right into the audit. Don’t be intimidated by the format, which is arranged according to regulations. A magnifying glass may be helpful because the charts are very detailed. Ask questions and learn from the answers. Take notes and highlight the key numbers in your copy of the audit. But avoid being drawn into confrontations or debates with the auditors or with other board members. The audit is a valuable window into district operations. It shouldn’t become a political “hot potato.” It is a look backward in time at the previous fiscal year and can provide useful suggestions for improvements to current and future financial operations.
NJSBA can provide a RFP template for issuing a request-for-proposals to conduct the audit. Yes, it may simplify the process to have the same firm conduct the audit year after year. But eventually the checks-and-balances aspect of using the audit to examine the integrity of district financial operations is weakened if the district uses the same audit firm indefinitely. That said, there is an undeniable value and efficiency when an audit firm is familiar with district operations and financial trends.
The audit is submitted to the district or charter school in late November and also directly to the New Jersey Department of Education by the auditors. The board secretary will prepare a synopsis or summary of the annual audit and recommendations. Typically the board receives the audit at a meeting in December, for the fiscal year that ended the previous June 30. The auditor will likely visit the district in December or January to present the audit and answer questions. The local board “receives” the audit but does not need to vote to “adopt” it. If there are negative findings and recommendations, then the board will need to vote to adopt a corrective action plan (CAP).
The audit is an annual event, yet it is not really a once-a-year thing. The audit will sum up the previous fiscal year and will reveal trends in spending and revenues. The audit can help to set a direction for future improvements to financial operations. Financial integrity is a year-round undertaking.
Policies on business operations are found in the 3000-series in NJSBA’s Critical Policy Reference Manual (CPRM). The CPRM is available free online to school board members (password protected; obtain the password from the school business administrator).
An NJSBA mantra is that “Good policies are clear, legal and workable.” If your policies on financial matters are overly convoluted, complex and legalistic they can be unintelligible and useless. In that case, the board members will need to correct that problem in order to ensure financial integrity.
Finance and Goal-Setting
District goals and long-range plans should be discussed periodically. Strategic planning and finance are intertwined. This topic is too large to dissect here, yet too important to ignore. One big problem is that focusing on financial details consumes all available time, to the exclusion of discussing the big picture. The overall goal is to optimize district spending in order to increase student achievement.
Some boards have had success in setting goals by scheduling “board retreats.” Retreats are meetings where district employees and board members discuss organizational goals, objectives and long-range plans. Be aware that these are public meetings and must be advertised under the Sunshine Law, and must be held in the district (not in some far-away location). District facilities must be used for board retreats if they are available. The requirement to hold these retreats locally was part of the School District Accountability Act (Chapter 53 of the laws of 2007, also colloquially called A-5 because of its bill number in the Assembly). Sections of the Accountability Act have become embedded into many policies.
Committee discussions of goals can provide many of the same benefits as a board retreat. But coordinating the assumptions and decisions of separate committees will be an essential step.
Board members should not be shy about asking questions about financial topics. Petty cash funds and student activity funds can cause headaches far out of proportion to the small amounts of money involved, if some of that money goes missing. What procedures are in place to keep these funds secure?
Many districts now have educational foundations. These organizations are separate from the school boards. Educational foundations can provide the resources for many projects as well as achieving long-term district goals. School boards may want to examine the educational foundation by-laws and procedures, with the goal of protecting the financial integrity of those organizations.
Preparing the Budget
In developing a school budget, the chief school administrator and the board of education must reconcile many conflicting opinions, wishes and expectations. The budget which the board adopts will need to be reasonable in cost, yet educationally sound and sufficient.
The board members, as representatives of their community, should encourage public input throughout their budget discussions. The board looks at the costs involved, the amount of money which will have to be raised through taxes, and the effect of the budget on the citizens’ pocketbooks. It then reconciles, in its best judgment, the educational needs of the district’s students with the ability of the community to support those needs. The district will need to financially support the educational goals set by the board and the superintendent. For example, if a specific smaller class size is desired in some grades, then enough staff will be needed to assure those class sizes.
Legislation enacted in early 2012 has eliminated – for districts that moved board member elections to November – the requirement that a school board submit its proposed budget to a public vote in April, provided that the budget remained at or below the state’s 2 percent tax levy cap. The overwhelming majority of boards in New Jersey have chosen this option. Therefore few districts now submit their budget to a public vote. However it is still important to adequately explain to the public the rationale for choices made in the school budget. The required public budget hearing is an ideal time to do this. Boards which still have an April vote on their budget also hold spring budget hearings.
Periodically, when funding is particularly tight, there is a wave of interest in charging students to participate in extracurricular activities. While athletics and other extracurricular activities are typically a small portion of the annual budget (in the range of 2-3 percent), when there is a budget pinch, requiring students to “pay-to-play” is sometimes suggested. NJSBA’s policy staff can provide information and policy text if a board is considering a move in this direction.
Before acting on such a policy, board members should ask many questions. For example, how much does each team or club cost per participant? Some athletic teams may cost the district less than $300 per participant, while others may be $600 or more per participant – and the expensive teams may not be those you might expect. Will a fee for participation raise a significant amount of money to offset costs, or merely be a nuisance that reduces student participation and detracts from the overall experience?
It is a good idea to get accurate information on actual costs before proceeding to make important decisions. Research your topic first, then make decisions. Detailed cost information can be assembled by the business administrator who is an essential member of the management team. Appointing an ad hoc temporary committee with knowledgeable members of the public (such as a financial manager or accountant) can help the board investigate topics with financial dimensions. The temporary committee makes recommendations to the full board by a set date. If the board has specific questions, these questions can be included in the instructions to the ad hoc committee. Asking questions is a key role of school board members. Keep asking questions on financial matters until the board is satisfied that it has received solid, complete information.
Code of Ethics
As board members, you are required to avoid financial conflicts of interest. School boards may not hire relatives of board members (“nepotism”). Board members must be vigilant to avoid any conflicts of interest. For example, no board member shall hold any form of paid employment with the district while he or she is serving, nor for six months after leaving office. Also, no board member shall have an interest directly or indirectly in any contract with or claim against the board. When in doubt, consult your board attorney or ask for an advisory opinion from the School Ethics Commission.
There are times when school board members should not be involved in votes or even discussion on certain matters. As a general rule, you should recuse yourself (excuse yourself from a meeting and abstain from discussing or voting on the matter being considered by the board) if participation would violate the School Ethics Act or other conflict of interest statutes and regulations. Recuse yourself when you (or your immediate family) have a financial involvement that might reasonably be expected to impair your objectivity. The Legally Speaking column in this issue includes information on legal decisions that address this topic. That article begins on page 10.
Where to Get Help on Ethics and Recusal Situations
There are several resources for help on ethics questions, including your board attorney, the New Jersey School Ethics Commission at (609) 984-6941, and the New Jersey School Boards Association.
Each year, usually in April, school boards receive training in the code of ethics. The provisions of the State Code of Ethics are reviewed. The governing principle of the Code of Ethics is that board members may not use the schools for personal gain or for the gain of friends. Board members sign documentation that they have received a copy of the Code of Ethics and have read and understood it. Complaints about violations of the code may be brought before the School Ethics Commission.
Limiting Wasteful Spending
Wasteful spending must be avoided. Policy 3327 on “relations with vendors” is one NJSBA policy that is focused on avoiding wasteful expenditures.
The state Legislature has placed special emphasis on avoiding excessive spending on professional services, including attorneys’ fees. Yes, timely advice from a competent school board attorney can be very valuable. Even so, boards must be prudent in their use of legal services.
All contracts for legal services must comply with the payment requirements and restrictions set forth in N.J.S.A. 18A:19-1. To ensure the prudent and cost-effective use of legal services, the district will…
- Limit and designate the persons with the authority to request services or advice from contracted legal counsel.
- Legal counsel will not be used unnecessarily to make management decisions
- Legal counsel will not be used unnecessarily to obtain readily available information such as district policies
- Requests for legal advice shall be made in writing.
- Contact logs and records shall be kept
- Records shall be reviewed to determine that the requests for legal advice are necessary.
- Advance payments for legal services are prohibited.
- Services shall be described in detail
- Invoices for payment shall be itemized.
- Payment shall only be for services actually provided
The Role of the Finance Committee
Committees can be an effective way to harness the expertise of individual board members. If there is an accountant or financial advisor who has been elected or appointed to your school board, consider placing that person on the Finance Committee.
NJSBA often advises boards that “Good policies are ‘clear, legal and workable.’” If situations arise that are not covered by your board’s policy, that is a powerful signal that a rewrite or new text may be needed.
Most policies on committees have a statement similar to this: “The board president and superintendent may be ex officio members of all standing committees providing that a quorum is not achieved.” Committee members should be reminded that they do not speak for the board; “Committees shall recommend yea, nay or no opinion to the board, but may not make decisions for the board.” If your policy doesn’t resolve those typical issues, that indicates your policy on committees is weak and does not meet the standard of “clear, legal and workable.”
Here is a partial list of the duties of a school board’s Finance Committee:
- Advises the board in all matters pertaining to finance, budget and the use of school money;
- Reviews adherence to laws and regulations governing the handling, collection, and disbursement of school funds by all employees of the school district;
- Reviews adherence to the budget as finally approved;
- Reviews the preparation of the annual budget;
- Insures that an annual audit is performed and prepared in accordance with the law;
- Assists all committees in estimating cost of projects and in determining the financial impact on the budget;
- Reviews and approves for payment all bills not specifically assigned to another committee.
Transfers of Funds
One aspect of financial operations that is often perceived to be a problem – but typically isn’t one but – is “transfer of funds.” Transfers of funds are an essential and inevitable part of school operations. Yes, it is a good idea to ask questions in order to understand the purpose and portent of a transfer of funds. And yes, a transfer can sometimes indicate that expenses have been piling up faster than expected in a specific budget line. But transfers also indicate the areas where funds are available due to lower-than-expected costs.
Often a transfer is a good thing. For example, suppose your district’s sports teams are having banner seasons and have advanced far into NJSIAA-run state tournaments. Funds may need to be transferred in order to cover the higher-than-expected cost of transporting students to games at remote sites.
The budget is a best guess on expenditures, made about 18 months prior to the end of the fiscal year. During those 18 months, things change. If expenses in one budget area are lower than expected, then expect a transfer of funds to other areas where the superintendent and board members may see an opportunity to use those funds in another area to boost student academic achievement. Often the amounts of transfers are low when compared to total expenditures in that area. Yet new board members, especially, may be spooked by transfers or may see them as something suspicious and ominous. In reality, transfers of funds are normal parts of district operations.
Financial integrity is paramount for school districts. It will safeguard the reputation of the district and confirm support for public schools. All school board members play a role in ensuring financial integrity. No one member alone can do this function; it is a role for the entire board, acting together as a team.