Mary Ellen Clark
Office of Operations and Management Services
Office of Audit Services
New York State Education Department
New York State Education Department
Center for School Leadership
with support from
The Wallace Foundation
produced and distributed by
New York State School Boards Association
February 2004 (On-line edition updated August 2010)
All too often, as school board members you are catapulted into the middle of the flurry of reports, communications, statistics, and intra-school relations. School staff, colleagues and the citizens who elected you expect instant effectiveness. Your effectiveness can be expedited through proper orientation and training. In the meantime, in your eagerness to be good contributing board members, the time to step back and reflect on governance issues is sometimes neglected.
Policy development is the board’s most important responsibility and as such should provide continuity of purpose and clear guidelines for staff performance. This is especially important for those policies that stem from requirements imposed upon the board and the school district by statute.
The board has statutory responsibility for ensuring that public monies are properly accounted for and protected. Fiscal Fitness – A Guide to Monitoring Your School District’s Budget has been prepared by State Education Department staff and produced and distributed by the New York State School Boards Association to assist boards of education in exercising their oversight responsibility for public funds. A board’s policy and responsibility will be brought to life in this document through the use of sample policies and reports and clear and comprehensive descriptions of financial practices and procedures. This will permit the board to better monitor the fiscal health of the district through its review of the district’s monthly and annual financial reports.
Commissioner of Education
Table of Contents
- Encumbering Process
- Budgetary Transfers
- Treasurer’s Receipts
- Check Process
- Fund Balance Projection
- Cash Flow Projection
- Audit of Claims
- Monthly Treasurer’s Cash Report
- Board Review Actions – Monthly Treasurer’s Cash Report
- Budget Status Report
- Board Review Actions – Budget Status Report
- Management’s Discussion and Analysis (MD&A) Statement of Net Assets
- Statement of Activities
- Combined Balance Sheet – Government Funds
- Statement of Revenues, Expenditures and Changes in Fund Balances – Government Funds
- Budget Development
- Fiscal Monitoring – Budget Administration
- Financial Condition – Reviewing the District’s Year-end Financial Statements
The most important reason for managing a school district’s financial condition is to sustain the education of students on a long-term basis. The socioeconomic environment and how management adapts to the climate are major factors that influence the fiscal health of the district. District wealth is a key determinant of its capacity to generate revenues. The district leadership alone has minimal influence to improve the wealth of a district. However, it can control how it adapts to the economic environment. Recognizing potential financial stress, making hard choices with programs and services, developing realistic budgets and making timely decisions when faced with stress are all within the capability of a district.
School districts must have structurally balanced budgets. This means that revenue estimates should be based on documented data. Estimated expenditures should reflect all recurring expenditures and include the cost of any new programs or activities. One-shot revenue sources should be carefully used so as not to generate long-term dependency.
A district is in sound financial condition if:
- It has enough cash on hand to pay current bills and those that are due shortly.
- It has sufficient revenues to support expenditures on an ongoing basis with minimum reliance on the district’s savings/fund equity.
- It can meet long-term debt obligations and maintain a good credit rating.
- It can provide education services at a level that meets the needs of all students demonstrated by student results that meet or exceed State standards.
- Its administrative staff has demonstrated a commitment to professional development and continuing education.
- Its long-range fiscal plan is compared frequently to actual progress and adjusted to meet dynamic environmental conditions.
- It maintains its buildings in a condition to avoid unexpected major renovation costs.
- It files all state and federal aid claims in a timely and accurate manner, to avoid few or no major post-filing adjustments.
- It engages an experienced auditing firm that encourages business office staff to discuss changes in school district accounting requirements as they arise, throughout the year.
- Frequent interaction occurs between the board of education and the administration relating to discussions of the district’s fiscal status and trends.
The accurate presentation of the school district’s financial affairs is the essence of the accounting/auditing system. Data generated from the accounting records are the basis for many decisions made by the board of education and the school district administration. A comprehensive district accounting policy should include all phases of the financial management, internal controls, accounting and auditing process consistent with law and regulation and the duties and responsibilities of the board of education. Such a policy should:
- Adhere to the Uniform System of Accounts for School Districts.
- Stipulate the creation, issuance and analysis of periodic financial reports (cash reconciliation, budget status, annual financial report, fund balance projection, cash flow projection, extra-classroom activity fund, etc.).
- Require the signature of the treasurer or, when designated, the deputy treasurer in the treasurer's absence, on district checks, and stipulate rules for the use of the facsimile check signer.
- Stipulate the responsibility of various fiscal officers of the district regarding budgetary transfers, encumbrance and mass encumbrance procedures.
- List the classification of expenditures and the procedure for approving claims for payment.
- Stipulate safeguards concerning the supervision and handling of cash and other district funds.
- Include the development of cash flow projections for investment and borrowing.
- Show the accounting and supervision of scholarship and trust funds donated to the district.
- Outline the governance procedure for extra-classroom activity funds.
- Outline the procedure for approval and reimbursement of travel and conference attendance.
- Stipulate the annual designation of the certifying official for payroll.
- Show the adoption of a scope of the annual independent audit of financial records.
Care should be taken to insure that the adopted policies conform with law, regulation and good business practices. See www.emsc.nysed.gov/ mtgserv/accounting/ for a sample recommended policy (select Sample Accounting Policy).
The following procedures should be included in the district’s administrative regulations to ensure that the board’s policy is understood and implemented by staff members.Encumbering Process
The encumbering process’s principal purpose is to prevent the creation of liabilities in excess of approved appropriations. It further aids in identifying line item accounts where unencumbered appropriations are available for transfer and also helps in the forecast of year-end fund balance.
In order for a school district to maintain budgetary control and to get an accurate estimate of its uncommitted appropriations, the district must encumber all of its known obligations. An encumbrance against an appropriation is required before an obligation can be created. Encumbering after the fact does not satisfy that condition.
Mass encumbering of all known obligations should be made to insure that the budget is not overspent, to project and arrive at an estimated June 30 fund balance and to maintain budgetary control.
These obligations include salaries, debt service, utilities, fringe benefits, BOCES contracts, and all other known obligations. Mass encumbering of all known contractual commitments should be completed at the latest by the end of the first quarter of each fiscal year.
Perhaps 85 percent of a budget should be mass encumbered as soon as these obligations are known and liquidated, as expense is incurred payroll by payroll, and claim by claim. It will be also necessary to make adjustments periodically to the encumbrances to reflect where expenditures are processed below or above expectations. An example is where staff replacement salaries are lower than the salaries of persons who have left, or when a mild winter has reduced utility costs.
The Uniform System of Accounts prescribed for School Districts, Education Law section 1718 and good budgetary control require that there be uncommitted appropriations available before encumbrances are placed or expenditures posted. Further, section 170.2(k) of the Commissioner's Regulations states that it is the board of education’s duty to keep the incurred obligations within the amount of the total annual appropriations voted or authorized, and the prior year's outstanding encumbrances. This requirement guards against the creation of liabilities in excess of the appropriations. Section 170.2(1) of the Commissioner's Regulations provides for such transfers and permits the board to authorize the chief school officer to make transfers within limits as established by the board.
Delegating this authority to the superintendent, combined with advanced encumbering of all known obligations, and encumbering purchase orders before release, will prevent expending appropriations beyond the amount authorized. Therefore, transfers must be made prior to the over expenditure or over encumbrance of an object code. The budget status report's (see page 11) appropriations (object codes) should never be overspent or over-encumbered.
The transfer of appropriations is of critical importance and all parties concerned – the purchasing agent, business official and the treasurer – should have written confirmation of the information. The purchasing agent needs to know if the transfer has been approved; the treasurer needs to have accurate information and documentation for accounting purposes; and the business official needs a record of the month's authorized transfers from which he or she can make a summary report to the board. It should be noted that any transfers authorized by the superintendent would be shown in the "Transfers and Adjustments" column of the budget status report submitted at the next board meeting.
A transfer request form should be used to control and document approval of budget transfers. The form acts as a document of original entry and should be recorded in the general journal and subsequently in the general ledger and subsidiary ledger accounts.
See www.emsc.nysed.gov/mtgserv/budgeting/ for a sample budgetary transfer form (select Budget Transfer Process).
Section 170.2(h) of the Commissioner's Regulations requires the district treasurer to acknowledge the receipt of monies paid over to his or her custody with pre-numbered duplicate receipts. The purpose of this regulation is to establish an audit trail for internal control that will protect the treasurer in the receipt of funds. Employees other than the treasurer who receive monies on behalf of the district must issue pre-numbered receipts in triplicate as required by section 170.2(i) of the Commissioner's Regulations.
The board of education should authorize a single signature check, bearing the signature of the district treasurer, and authorize the use of a check-signing machine. The value of having and using a check-signing machine is to reduce the time consumed in signing checks, as well as provide increased security and control over the issuance of checks. The treasurer must keep personal control and custody of his or her signature plate, must either sign the checks personally or be present when the checks are run through the check signing machine, and must maintain a log of the checks written. If the board appoints a deputy treasurer to serve in the treasurer’s absence, a separate signature plate is required for the deputy treasurer.
The board, assisted by the district business official and chief administrative officer, should develop a written policy governing the use of the check-signing machine. The safeguards listed below should be in board policy.
The treasurer should retain a key to the check-signing machine and should not surrender or delegate that responsibility to any other individual. The treasurer should be present and should control the check-signing process when checks are run and should compare the checks against the approved warrant and certified payroll.
The check-signing machine should be secured in a protected area and not available to unauthorized individuals. The signature plate should be removed and retained by the treasurer. When the treasurer leaves, his or her signature plate must be destroyed. The signing of blank checks should be expressly forbidden.
The treasurer should record the first and last number of checks run, the date of the run, the sequential number of voided checks within each run and maintain and sign the check-signature register. All voided or spoiled checks should be marked and retained. An inventory record, requiring user signature, should be kept and sequential use audited and verified.
An individual who is not a member of the business office staff, should audit the check register. This audit should be conducted at intervals approximating the payroll periods to verify the accuracy of the register against the machine's tally counter. Further, reconciliation should be made promptly (if possible, reconciliation should be completed the same day that cancelled checks and statement are received from the bank).
Fund Balance Projection
To begin with, fund balance is calculated based on the “modified accrual basis of accounting” and is increased by revenues and decreased by expenditures. Fund balance projection should begin by January and updated monthly. First, the revenue received to date and the estimated amount of revenue to be received during the balance of the year are added to the retained fund balance. Then the expenditures to date, outstanding encumbrances, and estimated expenditures for the balance of the year are subtracted from that amount to arrive at the projected fund balance.
See www.emsc.nysed.gov/mgtserv/accounting/ for an example of a format to be used for fund balance management (select Fund Balance Management).
Cash Flow Projection
Cash position is calculated based on the “cash basis of accounting” and is increased by cash receipts and decreased by cash payments. On the other hand, fund balance is a calculation that is increased by revenues and decreased by expenditures. A cash flow projection is similar to a fund balance projection except that it charts the expected cash position of the district throughout the year.
The cash flow projection should start in July with the beginning cash position of the district. The estimated monthly cash disbursements and cash receipts should be calculated to arrive at the cash flow projection for each month. Cash flow should be projected for all funds and for the entire school year and updated monthly. For an example of a format of cash flow projections, go to www.emsc.nysed.gov/mgtserv/accounting/ (select Investment Instruments and Cash Flow Schedules).
Audit of Claims
Claims may be audited by the board of education or by an internal auditor appointed by the board of education in accordance with either section 1709 (20a) or section 2526 of the Education Law. It is generally recommended that an internal auditor be appointed since this provides for more timely payment of bills and relieves the board of a routine financial function.
A claim to be submitted to the internal claims auditor for approval before the treasurer may make payment shall meet the following conditions:
- The purchasing agent's signature has authorized the release of the purchase order.
- The original receiving copy was signed and dated by receivers authorized by the board, indicating that the materials or services were received on the dates stated and the charges are correct.
- The purchase order or schedule of claims contains the purchasing agent's signature as the “officer giving rise to the claim.”
- The charges are not duplicates of an item(s) already paid.
- The proposed payment is for a valid and legal purpose.
- The unit price billed (invoice) does not exceed the bid or contract authorization.
- The extensions are correct, no unauthorized taxes are paid, discounts are taken, and transportation charges, where applicable, are accurate.
See www.emsc.nysed.gov/mgtserv/accounting/ for an example of a more extensive procedure that may be used by the internal claims auditor (select Audit of Claims).
The board of education should have a process to identify and monitor the district’s fiscal status to ensure its fiscal solvency and integrity. Each fund’s cash and budgetary status should be constantly monitored throughout the fiscal year so the district can predict and respond to fiscal stress.
Fiscal stress indicators may include:
- over-expended or over-encumbered appropriations;
- inadequate budget appropriations and/or revenues to carry the district through the remainder of the fiscal year;
- cash flow deficit;
- fund balance erosion or depletion;
- a growing inability of the special aid and/or school lunch fund to pay back inter-fund loans.
Monthly Treasurer's Cash Report
The treasurer is required to report to the board of education monthly on the status of all district funds in a monthly cash report. The cash report shows the district’s total cash position. It provides detailed information as to the sources of cash and whether funds received from these sources during the period were adequate to pay the district’s disbursements for the same period.
The report’s format is set forth in section 170.2(o) of the Commissioner's Regulations, which requires that the cash balance on hand be shown on the report. This means total cash balance, including checking, money management, savings accounts, certificates of deposit or any other of a fund's separate investment monies. The treasurer should include all funds' cash positions in the monthly report.
In addition, section 170.2(o) requires a report for each fund showing:
- the cash balance on hand at the beginning of the month;
- receipts by source during the month;
- total disbursements during the month;
- the cash balance on hand at the end of the month; and
- reconciliation with bank statements.
Pages from a sample treasurer’s monthly cash report using the Special Aid Fund as an example are available at www.emsc.nysed.gov/mgtserv/accounting/ (select Sample Treasurer’s Cash Report).
Board Review Actions – Monthly Treasurer's Cash Report
- Check for negative bank balances.
- Check to see if month-end balances reconcile to the bank statements.
- Review the kinds of adjustments that are being made in the bank reconciliation to see if these adjustments are in the normal course of the business, or if they point to a problem in the district’s systems or processes.
- Review the district’s cash flow projection to see if it has been adjusted to reflect any material differences in the district’s cash position.
Budget Status Report
The budget status report compares a district’s budget against actual revenue received and expenditures/encumbrances incurred at a fixed point in time during the school year. It provides an accounting of how budget estimates compare to actual activity to ensure that the district does not overspend. It also provides a sense of the school district’s capacity to budget accurately and its ability to enforce the budget and control finances during the course of the year.
The treasurer must also present the board with the budget status report for each fund at least quarterly; monthly if transfers were made. The presentation and format is in section 170.2 of the Commissioner's Regulations. The regulation and sound fiscal management practice outline the format in which the budget status report must be presented. The format, which appears below, is not optional; it is mandated.
Revenue accounts must include:
- Estimated revenues
- Amounts received to date of the report
- Revenues estimated to be received during balance of fiscal year
Appropriation accounts must include:
- Original appropriations
- Transfers and adjustments
- Revised appropriations
- Expenditures to date
- Outstanding encumbrances
- Unencumbered balances
In addition to the information required by regulation, the district treasurer should consider adding the following to the status report:
- A column to the revenue section to show adjustments (overages and deficiencies) to the original estimate for each account code and a column to show the current estimate of revenue for each account code (original estimate plus or minus any adjustments)
- A column to show the percent of revenue collected for the current year
- A column to show the prior school year’s actual revenues and expenditures for each account code
To see pages from a sample budget status report, go to www.emsc.nysed.gov/mgtserv/accounting/ (select Sample Monthly Financial Reports).
Board Review Actions – Budget Status Report
- Review the budget status report to determine the number of function-object budget codes that have been overspent or over-committed. It should be noted that both Education Law section 1718 and Commissioner’s Regulation section 170.2 prohibit budgetary overspending or incurring an obligation for which an appropriation does not exist.
- Review the report to determine whether all known obligations are mass encumbered to preclude over-commitment of a specific code or transfer of an appropriation when there is really no excess amount. The types of expenditures which lend themselves to mass encumbering are salaries, debt service, fringe benefits, utilities, contracts, and payments to BOCES.
- Review the report to see if any accounts are overspent.
- Ascertain whether any modifications to the spending plan are required.
- Review budgeted revenue from each source to determine if budgeted amounts are being realized. How close is actual revenue received to the budgeted amount? Does the district expect to realize the uncollected portion of the revenue by the end of the school year? Estimated revenues projected for future years’ budgets should be adjusted accordingly if there is a gap between actual revenue received and the amount projected for those years.
- Review both revenue and expenditure figures to see if expenditures are being kept in line with actual available revenues. It should be noted that actual and expenditure amounts and adjustments to the original budget should be considered in developing the next year’s budget to be presented to the voters.
Key Annual Financial Statements
Education Law section 2116-a and Commissioner’s Regulation section 170 require the board of education to secure an annual audit by an independent auditor.
The district’s financial statements are made up of many schedules and include the following major components.
- Management Discussion and Analysis (MD&A)
- Statement of Net Assets (district-wide)
- Statement of Activities (district-wide)
- Combined Balance Sheet – Government Funds (by funds)
- Statement of Revenues, Expenditures and Changes – Government Funds (by funds)
- Notes to Financial Statements
- Required Supplementary Information (RSI) other than MD&A
In addition, the independent audit firm is required to issue a management letter as part of the audit. The management letter should include recommendations for improvements that should be brought to the board’s attention.
Additional information concerning the audit of financial statements can be found in the State Education Department’s Audit Reference Manual, available at www.emsc.nysed.gov/mgtserv/accounting/ (select Audit Reference Manual).
Management’s Discussion and Analysis (MD&A)
The Management’s Discussion and Analysis, which introduces the district financial statements, is a required component. It is intended to be a readable, objective analysis of a school district’s financial activity during the year.
It serves to introduce and summarize the information contained in the statements that follow and provides a framework and context for understanding the information they contain. Information regarding the MD&A can be found in the Audit Reference Manual, Appendix 1, at www.emsc.nysed.gov/mgtserv/accounting/ (select Audit Reference Manual).
Statement of Net Assets
The Statement of Net Assets reports the district’s assets, liabilities and net assets. Net assets equals assets minus liabilities. This statement includes capital assets and depreciation on capital assets. It is similar to a balance sheet. For more information on the Statement of Net Assets, go to www.emsc.nysed.gov/mgtserv/accounting/ (select Audit Reference Manual).
Statement of Activities
The Statement of Activities reports revenues, expenses and other changes in net assets of the district as a whole. It is similar to an income statement. The Statement of Activities also reports gross expenses, offsetting program revenues and net cost information at the function or program level for the current year. General and other revenues are reported separately from program revenues.
The significance of this statement is that for the first time there is a presentation of the district’s net cost, financed by general revenues (taxes and state aid) of each major function or program.
For more information on the Statement of Activities, go to www.emsc.nysed.gov/mgtserv/accounting/ (select Audit Reference Manual).
Combined Balance Sheet – Government Funds
Whereas the Statement of Net Assets is a report of all district funds, the Combined Balance Sheet is presented by fund types, in this case government funds (general fund, debt service, other governmental funds). This balance sheet primarily contains short-term financial information. It allows the board to examine the district’s short-term assets and liabilities, determine the short-term need for cash, assess short-term financing needs and the district’s ability to meet them, and analyze the nature of current financial resources.
The fund balance section of the balance sheet presents the reserved and unreserved portion of the fund balance. Reserves signify portions of fund balances that are set aside for future purposes and therefore cannot be appropriated for general uses. The unreserved portion may include an amount designated to fund part of the next year’s budget. Generally, the only truly available portion may be the unreserved (and undesignated) balance in the general fund. For an example, go to www.emsc.nysed.gov/mgtserv/accounting/ (select Audit Reference Manual).
Statement of Revenues, Expenditures and Changes in Fund Balances – Government Funds
The Statement of Revenues, Expenditures and Changes in Fund Balances is also presented by fund types (government funds). This statement focuses primarily on cash and other current financial resources that enter and leave the district, and the district’s short-term resources and resource needs. It enables the board to examine the flows of short-term resources. It shows whether expenditures match revenues, and indicates whether the district will be able to pay for future services. For more information, go to www.emsc.nysed.gov/mgtserv/accounting/ (select Audit Reference Manual).
Questions Regarding Key Financial Management Practices
In addition to the questions specific to each of the reports, the following questions address key areas related to budget development, budget administration, financial condition, and other fiscal monitoring. The questions will help boards of education understand some of the district’s key financial management practices.
- What written information is available to district staff regarding budgetary objectives and budget preparation procedures?
- Does the district establish a budget calendar to ensure the various phases of the process are completed in a timely manner?
- How is public input solicited and considered in developing the budget?
- Are the district’s budgeted amounts for educational programs adequate to ensure all students meet the higher standards or does the district need to consider alternatives?
- How does the district’s budget relate to its strategic plan, long-term operating plan and capital plan?
Fiscal Monitoring – Budget Administration
- What obligations does the district mass encumber at the beginning of the year?
- How often does the district prepare budget status and treasurer’s cash reports to monitor its financial condition?
- How often does the district compare budget revenue and expenditure amounts to actual results? Does the district take action to keep expenditures in line with revenue?
- How does the district ensure projected (uncollected amounts) revenues are not overstated? Are projected revenues updated, as new information becomes available?
- How and when does the district project its year-end fund balance?
Financial Condition – Reviewing the District’s Year-end Financial Statements
- Did the district end the year with a surplus or deficit with its revenues and expenditures? What caused the district to have a surplus or deficit? At what point did the district become aware of the surplus or deficit?
- How are revenues trending in comparison to expenditures over the past three to five years? Are expenditures out-pacing revenues?
- What are the reasons for significant variances that occurred between the district’s budget as amended, if applicable, and actual revenues and expenditures?
- How much is in the district’s General Fund – Fund Balance (savings) account? Has the district been adding to or depleting this account in the past three to five years?
- How does the district determine how much fund balance/savings to designate toward next year’s budget? Does the district comply with the two percent limit for undesignated funds?
- Ask your business official to explain the district’s financial reports.
- Ensure your management team is adequately trained to understand the district’s finances.
- Make sure you are budgeting five years ahead.
- Take advantage of services and information from the New York State School Boards Association, the New York State Council of School Superintendents, the New York State Association of School Business Officials, the State Education Department and your district superintendent.
- Check the district’s state aid and building projects on the web: http://stateaid.nysed.gov/ and www.emsc.nysed.gov/facplan
- Discuss the district’s year-end financial condition and the management letter with the district’s independent auditor (certified public accountant).
- Check for information on school business management on the website: www.emsc.nysed.gov/mgtserv/districtmanagement/
- Check for information on the Office of the State Comptroller’s website: http://www.osc.state.ny.us/
Accruals. Expenditures that are incurred in the current period but will notbe paid until the next period, or revenues that are earned in one period butwill not be received in cash until the next period.
Adopted budget. A document that provides budgetary appropriations necessary for expenditures. The Uniform System of Accounts for School Districts requires that the adopted budget be recorded in the districts accounts. This is done through budgetary appropriations entries, which are made at the function level – for example, Teaching – Regular School – and object level, 2110.2 Equipment, in at least the same detail as the SBM budget document. See www.emsc.nysed.gov/mgtserv/budgeting/ (select SBM-1).
Advance (mass) encumbering. Encumbering all known obligations early in the fiscal year. This helps maintain budgetary control and helps give an accurate projection of fund balance savings.
Budgetary appropriations. These authorize and limit spending authority. Budgetary control requires that appropriations are available prior to incurring an obligation. Each appropriation account must show the amount of the budgetary appropriation, the account encumbered but remaining unexpended, the amount expended, and the unencumbered balance.
Encumbrances. These are commitments related to unperformed contracts for goods and services used in governmental (fund) accounting because governments cannot legally expend more than the amount authorized (budgeted). An encumbrance is partly: (a) a budgetary entry because it represents a future expenditure and the authority to spend, and (b) a proprietary entry because it is a contingent liability that will become a liability to pay for goods and services received by the district. When an employee is hired and before that person is put on the payroll, or when a purchase order for an item or service is created but before it is sent out, an encumbrance must go into the accounting records. When the district receives the item or service, that encumbrance is “liquidated” or cancelled.
Expenditures. These are recognized when the district has received goods and services and becomes liable to pay for them.
Revenues. Also known as receivables, these are recorded when measurable – in dollars – and available – collectible in the current period or soon thereafter to pay liabilities owed at year-end.
Key State Education Department Contacts
Educational Management (518) 474-6541
Audit Services (518) 473-4516
State Aid (518) 474-2977
Facilities Planning (518) 474-3905
Grants Management (518) 474-3936