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569WVN #433: Consultants, auditors question accounting

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  • waylandvoters1
    Jan 3, 2012
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      Dear Wayland Voter,

      Happy New Year. The quarterly property tax bill sent to you a few days ago reflects $4 million in tax relief, a windfall for which the Abrahams Group is partly responsible. The consultants' work, authorized by voters' action at 2010 Town Meeting, revealed serious flaws in town and school accounting.

      The final report, recently presented to a special town committee, points to more work to be done and indirectly pokes holes in frequent assurances from town officials over the years that Wayland is a fiscally well managed town.

      The tax relief voted in November responded to a pattern of overtaxing that resulted in exceptionally high surpluses. Still to be dealt with are actions to provide better monitoring and more transparency, and also to stave off lawsuits from school parents who may have been overcharged for special services while the general taxpayers shouldered part of those costs.

      And, coincidentally, a new audit report warns of two other problems: the town could suffer from bond interest rate risk and may be inadequately protected against bank failure.

      New Information in FY11 Restatement Report

      Major points emerged from the Abrahams Group's final presentation to the Operational Review Committee. The Committee welcomed questions and comments from the audience during the Dec. 21 meeting.

      The Abrahams Group restated (corrected) Wayland school accounts for Fiscal Year 2011 (ended last June), adding an additional $691,998.57 to town free cash primarily from revolving accounts for transportation and athletics.
      http://groups.yahoo.com/group/waylandvotersnetwork/message/565

      Abrahams said it had never performed such a large restatement of accounts -- $1.615 million in all. Restatements are uncommon, President Mark Abrahams said. Most changes were between Wayland school accounts and didn't affect the bottom line.

      The Abrahams team said it had received no inquiries from the town auditor, Melanson & Heath, which recently submitted the annual audit for FY11. ORC Chair Rebecca Chasen said this issue of the two firms concurrently reviewing the town's finances apparently without awareness of each other's work should be raised to those overseeing the audit.

      Moving the $691,998.57 to free cash requires School Committee action. As a result, total free cash would be nearly $6,996,702.57, even after the decision at the Nov. 17 Special Town Meeting to withdraw $4 million to lower taxes. That, plus $421,500 released by the assessors from the Overlay Reserves to the Overlay Surplus, means that halfway into Fiscal 2012 there could be over $7.4 million in the combined surplus. That's 10.7% of the town's operating expense, again above the Finance Committee's generous guideline of 5-10%.

      The majority of the new restatements to free cash come from revolving funds for athletics, $301,798.75, and transportation, $322,818.45, in which fees collected were not completely spent, meaning that taxpayers paid more than they should have for these activities, said Kathy Griffin of Abrahams Group. In each of these funds, the fees were set to cover only a portion of the costs. She stressed that refunds to free cash are needed to avoid taxpayer lawsuits, and to adhere to the principle that each fiscal year has 12 months, and special funds should have a zero balance at the end of the year. Apparently in FY 10 no fee payments were expended, and little in FY 11.

      The School Committee and then-Superintendent Gary Burton instituted transportation and athletic fees over the last several years under protest, in order to create budgets meeting FinCom guidelines. Burton and several members said in the past that such fees violated the basic philosophy of "free" public education. The Committee has always referred to these fees as "offsets."

      Geoff MacDonald, the school business manager who replaced the retiring Joy Buhler in mid-2010, suggested the funds remain in the School Committee accounts. Griffin responded, "I totally, totally disagree," reiterating that a fiscal year has 12 months.

      There was some discussion about the need to segregate athletic gate receipts and booster contributions, both of which fell in a separate category and could be carried over year to year.

      If transportation revenues are deferred, the town finance director would have to approve this accounting, and new submissions to the Massachusetts Department of Revenue (DOR) and Department of Elementary and Secondary Education (DESE) would be required. At the end of the day, the result is the same, Griffin said. Mark Abrahams commented that one could collect fees in June for the next year and transfer these to the next year.

      The Abrahams Group recommended the school accounts stay on a fiscal year budget basis and contain policies for refunds. Although there are no laws that fund balances should revert to zero, there is a general rule that such funds should be expensed.

      Mark Abrahams indicated the need for policies for each fund along with the specific rule adopted by the School Committee that is applicable to that fund.

      Another strong recommendation was that the School Committee should have Dec. 31 actual expenditures when making its proposal for FY 13 and that the revolving funds be accounted for quarterly to provide better monitoring. These should be quarterly, but could initially be semiannual, and will provide greater public transparency. If this isn't sufficient, an annual audit has 20 steps outlined in the "compliance supplement" by the DESE, Abrahams said. The selectmen would need to enhance the town auditor's Scope of Work to specify such supplemental steps to ensure compliance.

      Instead of voting offsets, Abrahams suggested, the School Committee should simply disburse from the fees paid to the two programs and draw the remaining needed amounts from the school's operating budget.

      The town hired the Abrahams Group in the summer of 2010 for two tasks: to investigate general accounting within the school and town, and to reconcile the school's accounts for FY11 so that they would be usable in preparing the FY13 budget. In prior administrations, it was difficult for the School Committee to understand the precise allocation of staff.

      Two Types of Funds

      There are two types of revolving funds: those paid partially by fees, such as athletics and transportation, and those paid entirely by fees, such as BASE, full day kindergarten, and Pegasus.

      BASE, the program for children before and after school hours, had the largest restated fund balance of $514,478.78. The excess funds in BASE should be returned to the parents, Griffin stated, but Chasen noted that to do so raises the need to comb through past years' books to ascertain if there was a refund due in a particular year depending on whether that year showed a surplus. Barb Fletcher, representing the School Committee on the ORC, said the School Committee has discussed doing this. The Committee has already committed to refund excess payments over $4,000 per child for the last two years, since the advent of Full Day Kindergarten, a related program with similar costs.

      Pegasus, a summer program, has $341,101.50 in its account.

      Superintendent Paul Stein agreed that in the future funds would be spent in the year obtained, and accounts would last for 12 months. The Abrahams FY11 Restatement Report is available at http://www.wayland.ma.us/Pages/WaylandMA_BComm/Finance/RestatementReport.pdf

      The Abrahams Group agreed to make three edits to Part 2 of its report first issued last March. With that the ORC voted unanimously to accept the revised report as amended. The committee then discussed next steps regarding the separate FY11 Restatement Report. They voted unanimously to accept the General Fund Expenditures portion of the report and to invite Business Manager MacDonald to meet with them in January regarding the Revolving Fund section.

      Audit Red Flag?

      The Melanson & Heath auditor's report contains an item that should catch some notice: "As of June 30, 2011, $40,019,068 of the Town's bank balance of $74,983,397 was exposed to custodial credit risk as uninsured or uncollateralized." The report explains that Massachusetts General Law Chapter 44, Section 55, limits the Town's deposits "in a bank or trust company or banking company to an amount not exceeding sixty percent of the capital and surplus of such bank or trust company or banking company, unless satisfactory security is given to it by such bank or trust company or banking company for such excess." The town does not have a deposit policy for custodial credit risk, the audit report states.

      This means that if the bank goes under, as many have over the years, the town could lose its money.

      Nor does the town have a "formal investment policy that limits investment maturities as a means of managing its exposure to fair value losses arising from increasing interest rates." The town has $863,772 in bond mutual funds with maturities of 6-10 years, while $3.019 million is in CDs of less than 1 year.
      http://www.wayland.ma.us/Pages/WaylandMA_Finance/Finstatements

      If interest rates rise, bond values drop. Longer term bonds drop in value more than shorter term bonds for a given change in rates. Any significant holding of longer term bonds (or bond mutual funds) means the town could lose money.

      --WVN Staff

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      MEETING CALENDAR: 2012 begins with major boards all meeting on the same night as the FY13 budget planning season continues, on Tuesday Jan. 3. FY13 department capital (CIP) request forms are not publicly available. With Fiscal 2012 half over, no FY12 reports are publicly available showing what has been expended to date.

      Some meeting agendas are posted on the town website meeting calendar:
      http://www.wayland.ma.us/Pages/index

      Recreation Commission: meeting with Selectmen, athletic fields
      Board of Public Works: meeting with Selectmen
      Finance Committee: proposed FY13 operating & capital budgets
      Selectmen: water reserves
      School Committee: presentation of the FY13 school dept. budget
      Planning Board: Town Center public hearing

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      Michael Short, Editor