THE VIRGINIAN-PILOT
Copyright (c) 1995, Landmark Communications, Inc.
DATE: Saturday, November 4, 1995 TAG: 9511040282
SECTION: FRONT PAGE: A1 EDITION: FINAL
SOURCE: BY TOM HOLDEN AND VANEE VINES, STAFF WRITERS
DATELINE: VIRGINIA BEACH LENGTH: Long : 222 lines
An independent audit of the school system released Friday revealed that the 1994-95 budget was overspent by $12.1 million - 66 percent more than the $7.3 million shortfall announced by the city in August.
The report outlines a financial morass unique in the city's history, and ultimately caused by poor budget planning on the part of school administrators, who then failed even to follow the document they created.
The effects could linger for years - from an expanded hiring freeze to further delays in the purchases of capital equipment - and are likely permanently to alter the City Council's relationship with the state's second largest school system.
The audit by KPMG Peat Marwick found that the $12.1 million deficit is a combination of a $5.7 million shortfall in estimated income and $6.4 million more in expenses than was listed in the $340.8 million approved budget for 1994-95.
Councilman Robert K. Dean, who represents the Princess Anne Borough, expressed outrage over the deficit.
``If you are budgeted for $354 million, and you spend $360 (million) you have, in fact, violated the law in Virginia,'' he said. ``If it happened on the city side, someone should be held accountable, someone should be held responsible, and someone should lose their job. Period.
``I am very concerned about this budget deficit, whether it will get into the classroom where it will affect the education of our children.''
Among the firm's key findings:
The school system used an operating budget without realistic supporting assumptions and documentation for many key revenue, payroll and nonpayroll expenses.
Detailed comparisons of the school system's budget to actual expenses was of limited value because of an enormous number of budgetary transfers totaling $43 million.
The payroll costs were based on documents the school system's financial administrators could not have fully understood.
The system lacked a sound method to track budget and payroll expenses and thus allowed the administrators to hire people for whom there was no money.
Department heads who oversaw budgets did not have control over those budgets, making it difficult for them to manage and monitor progress of actual versus projected expenses.
The City Council and the School Board will meet formally Tuesday in separate sessions to hear a presentation by KPMG Peat Marwick auditors. At the same session, the council is expected to consider bailing out the system with a $12.1 million loan.
Mayor Meyera E. Oberndorf said the report raises serious questions about how school administrators performed their jobs.
``It looks like a system in chaos, in which people were not schooled in how to perform their bookkeeping responsibilities,'' she said. ``It does not look like they were accountable. Who was in charge? Who made these decisions?''
John A. Baum, the council's Blackwater Borough representative, said: ``The numbers don't need a lot of editorializing. It's just a whole lot worse than we thought. I have not had a chance to digest it, but I gather the projections for this year are not too good.''
In fact, school officials announced last month that the 1995-96 budget could come up $6.6 million short. That would make the cumulative shortfall for the two fiscal years $18.7 million.
The audit's findings could not have come at a worse time for the school system, which is already under stringent cost-cutting measures implemented when the original debt was uncovered earlier this year.
After learning of the previous $7.3 million deficit, the School Board initiated a hiring freeze on all positions, allowing hires only when positions were necessary to meet accreditation and governmental guidelines.
The board reduced professional development activities, including travel workshops and membership dues, from 50 percent to 90 percent, and delayed the purchase of buses and automobiles.
Even with these and other cuts, the division stands to save only about $5.3 million. Another round of $1.3 million in cuts is planned for January. The new findings are likely to make these cuts more severe.
The news further outraged teachers and parents, already worried that this school year's financial pinch ultimately will be felt in the classroom.
``It makes me furious because teachers are in there working really hard every day - being accountable for the work they do and the students they teach - and the people in administration who are responsible for the finances didn't take care of their responsibilities,'' said Vickie J. Hendley, president of the Virginia Beach Education Association, a teachers group. ``They let the children down.''
``I'm flabbergasted,'' said George Faatz, a member of Citizens for Better Education, a grass-roots civic group. ``I think it shows that it's been an insiders' club down there for much too long. There are a lot of people with good intentions, but most of them certainly won't tell on each other if they don't think things are going the way they should.''
Several School Board members contacted Friday likened the higher price tag to more salt in an already gaping wound. But they said the board must focus on fixing the problems highlighted in the report.
``It's very unfortunate - whether it's $7 million or $12 million,'' said board member Joseph D. Taylor.
``We understand that we've got to take care of the problems . . . and we've been trying to do a lot of that for the past several months,'' he said. ``We have to do what needs to be done, get the money from council and then pay it back, and then move forward.
``Checks and balances are what's been missing. The goal now is to fix that.''
Ulysses V. Spiva, a board maverick, agreed.
``This audit provides a lot of details and tells us how to build sufficient safeguards to make sure this never happens again,'' he said.
Spiva previously suggested that the board call for its own independent audit. On Friday he said he would now prefer to see the district bring in some nationally recognized school-finance experts to further scrutinize the city's history of funding local public schools.
Spiva and several other board members could only speculate on how local officials somehow missed the additional $4.8 million deficit discovered by the auditors. But all the cards may not have been on the table when the $7.3 million deficit was documented, Spiva said.
The auditors, for example, tacked on $1.6 million when they discovered that a state sales tax payment received in August for that amount was recorded for 1994-95 - although regulations say it should have been recorded for 1995-96.
Interim Superintendent James L. Pughsley and Donald A. Peccia, associate superintendent for administrative services, declined to comment Friday on the report or any of its findings. Both said it would be publicly discussed at Tuesday's board meeting.
Spiva said more board members should have paid closer attention to the finances or at least raised more questions about them. But he and at least one other board member interviewed Friday said most of the trouble originated with former Superintendent Sidney L. Faucette, who resigned this summer to take a job in Georgia.
``There clearly was a lack of discipline at the top,'' said board member Tim Jackson. ``What does all of this say to me? It says that you have to ensure that the person in charge of the school system is above reproach and is of the highest integrity because leadership starts at the top.''
Faucette was unavailable for comment Friday. An employee in his office said he was aware of the report but had not yet received a copy.
Mordecai L. Smith, the district's chief financial officer, who was placed on administrative leave in September, said he often alerted Faucette to problems with excess spending and deficit spending from one year to the next.
``The problem is that people seem to have amnesia about the fact that the budget that's given to the board is not the budget that the budget office gives to the superintendent,'' he said. ``When a superintendent receives a budget, he makes certain changes to that budget - which is what's been done in each of the years under the former superintendent.''
Faucette, he said, rarely shared with the board the information describing the financial impact of his budgetary changes over the course of a school year.
In many cases, Smith said, Faucette also urged the board to approve large transfers of money while he kept the board in the dark about any resulting budgetary side effects.
Smith also said he lobbied his bosses for years to get rid of the ``old, archaic'' system the district uses to monitor and control personnel costs.
Since August 1994, Smith alone had served as chief financial officer, director of budget development and director of accounting.
The audit report highlighted problems within the system itself - weaknesses that apparently had much less to do with any given leader than with the soundness of the internal structure.
One of the report's key recommendations, for example, simply called for the district to do a better job of preparing, documenting and saving information on which it bases its financial projections.
The audit also reported that the school system apparently didn't always follow its own policy.
After former board Chairman James R. Darden took over in the summer of 1994, he pushed the board to adopt a policy on transferring funds. The policy, which is still in place, says the administration must get board approval for transfers of more than $10,000. Before that, both Darden and Smith said the administration essentially shuffled money around with little or no oversight.
The audit report, however, says ``evidence of explicit Board approval for all budget transfers over $10,000 made in fiscal year 1994-95 could not be obtained.''
``I think there was just too much blind trust'' on the part of most board members, Spiva said. ``I hope all of this makes everyone more willing to ask the hard, tough questions and keep their eyes open. We must now implement the things mentioned in the report. There were some goofs, and the public expects those to be straightened out and assured that they won't happen again.'' MEMO: THE DEFICIT
Deficit reported before audit: $7,334,575
Decreased revenues
The state sales-tax payment received in late August was included in
the 1994-95 budget, which ended June 30. It should be recorded as
revenue in the 1995-96 budget. $1,607,783
Summer-school tuition was paid before the summer school session
began, even though all but a few days of summer school occurred after
June 30. The money should be applied to the 1995-96 budget because
that's when the related expenses occurred. $517,914:
Total revenue adjustments: $2,125,697:
Increased Expenditures
Excess payments were made by the school system to the Virginia
Retirement System for insurance and premiums. This money cannot be
credited until it has been verified, which to date has not been done.
$2,025,000
Electric bills for power used before June 30 were charged to the
1995-96 budget even though the bills came in after that date. They
should be charged to 1994-95 budget. $512,515
Certain expenses for renovation and asbestos removal were transferred
from the operating budget to the capital projects fund. That money had
to be moved back to the operating budget, where it belonged. $270,359
School system did not have to transfer as much money from the
self-insurance fund to the school operating fund as it had anticipated,
resulting in a $124,553 subtraction from the amount of the deficit.
Money had to be transferred to the athletic fund to cover additional
athletic expenditures paid out of that fund. $23,172
Total revenue adjustments: $2,706,493:
Audited fund deficit: $12,166,765
Less Encumbrances at June 30. These are purchase orders that were
carried over into 1995-96 with 1994-95 budgeted money moved into the
1995-96 budget to pay for them. (A $108,665 subtraction from the amount
of the deficit.)
Audited Fund Deficit at June 30: $12,058,100:
ILLUSTRATION: Photos
Virginia Beach Mayor Meyera Oberndorf: ``It looks like a system in
chaos.''
John A. Baum, city councilman: ``The numbers don't need a lot of
editoralizing. It's just a whole lot worse than we thought.''
Vickie J. Hendley
KEYWORDS: DEFICIT VIRGINIA BEACH SCHOOL BOARD AUDIT BUDGET by CNB