Letter to Finance Committee re: Under-reporting of Shrewsbury’s Per-Pupil Expenditures

Posted 3/18/2015.  The following is the letter and two exhibits that I presented to the Finance Committee at its March 7 budget hearing. I have also inserted two follow up comments as of 3/17 (in italics). The Town Manager admitted at the hearing that expenditure reports by municipal departments in support of the schools were under-reported, but claimed that the amounts were insignificant. But since he also admitted that these reports were only estimates, he cannot know if total under-reporting from all municipal departments is significant or not.

TO: Shrewsbury Finance Committee

FROM: John Lukach

SUBJECT: Under-reporting of Shrewsbury’s Per-Pupil Expenditures

Shrewsbury’s reported per-pupil expenditures are under-reported because the detailed End of Year Report (EOYR), which the school department is required to submit to the state each year, under-reports expenditures by some municipal departments in support of the schools. I have raised this fact at several public meetings in the past, but town officials continue ignore this problem.

At a public meeting last spring, the Town Manager even conceded that there was some under-reporting, but claimed that the amounts of under-reporting were insignificant. But on other occasions the Town Manager has admitted that some of the reports of municipal expenditures on behalf of the schools are only estimates. Thus he would not know if under-reporting is significant or not unless an analysis is done to ensure that all costs of town services (direct and indirect costs, and overhead such as pension and health insurance) that support the schools, have been fully allocated.

And total town expenditures in support of the schools are indeed substantial. The school department’s FY14 EOYR shows that total town spending in accounts that are included in the per-pupil expenditures calculation was $14 Million. So while under-reporting in a few small accounts may be insignificant relative to this total, even small percentage errors in some larger accounts may add up to hundreds of thousands of dollars that are not being included in per-pupil expenditures.

On almost every other budget question, the Town Manager prides himself on providing precise numbers. For example, if someone is commenting on a budget account and refers to it as roughly, say, $600,000, the Town Manager usually feels compelled to provide the exact amount to the nearest dollar. But on this one issue, under-reporting of town expenditures in support of the schools, he apparently has no interest even in developing better estimates, let alone precise numbers.

When I raised this issue last year, the school superintendent commented that the school department was reporting expenditures on the EOYR correctly, and that the report was audited, implying that therefore there could be no under-reporting. But that is a false conclusion. I am sure his people know how to copy totals from municipal department reports onto the EOYR, and an audit that costs only $4,000 (last year’s cost) doesn’t buy much, if any, actual testing of source data. It is the accuracy and completeness of spending reports that municipal departments provide the schools that is the issue.

But some may ask why under-reporting of expenses in support of the schools matters. It matters because town officials have almost unanimously used Shrewsbury’s reported lower-than-average per-pupil-expenditures to justify operating overrides. If they are going to rely so much on that number, they should have to present convincing documentation that the number is complete and accurate.

It also matters because school officials have claimed that the state has been penalizing Shrewsbury with lower state aid because the town doesn’t provide adequate support to the schools. The recent override added about $4.2 Million in school spending this year. If a detailed review of town spending in support of the schools resulted in reporting an extra $1 Million or more in school spending, it could make it that much easier to get more state aid.

If we agree that there is some under-reporting of these expenses, and if under-reporting can have serious consequences, then we should be anxious to know the amount of under-reporting as soon as possible.

Major Areas to Investigate

1) In the past I have pointed out that some departments may under-report because allocations of indirect costs and overhead may not have been added to the direct cost of services provided to the schools. For example, in FY14 two police officers were assigned full-time to the schools. The attached Exhibit 1 is an illustration of one method for allocating indirect costs and overhead in the police department budget. I chose the police budget for this illustration because it is publicly known that two police officers are assigned full-time to the schools for nine months of the year. Using the method shown, the estimated cost of assigning these two officers to the schools would be $161,000. But the reported cost on the FY14 EOYR was only $108,000. This is an understatement of $53,000, or 33%. Some may disagree with my definitions of indirect and overhead costs in the illustration, and that is fine. The point is that there needs to be a reasonable methodology for capturing indirect costs and overhead associated with every service provided to the schools. If there is some such methodology, wouldn’t the Town Manager already have made it available?

Others will argue that $53,000 is a trivial amount compared to total school spending, but they would be missing the point. This expense is a 33% understatement. If similar percentage understatements exist in the reports of other municipal departments that provide many more services to the schools, the combined understatement would certainly be significant.

{3/17 Follow up: The school department updated its EOYR as of 3/6. The reported expenditures by the town for school security had been reduced to only $65,000! The under-statement is now $96,000, or 60%!}

2) The methodology in my illustration captured departmental indirect costs and overhead, but it does not capture an allocation of the police officers’ overhead costs for their pension or their health insurance, since these are not in the department budgets. These costs should be obtained and added to the total cost of services reported to the schools.

In other departments an allocation of their employee’s pension and health insurance costs to the schools may be more difficult to develop because the resources that support the schools are not so well defined, i.e. two police officers, but the increased report accuracy would be well worth the effort.

{3/17 Follow up: I investigated this point further on the DOE website under Financial Accounting and Reporting: Other Municipal Departments. It said that’ The cost of insurance and retirement benefits for non-school district employees shall not be included or reported.’ Therefore, there is no under-reporting in this area. I am surprised, however, that school officials were apparently unaware of this guideline, since they failed to point it out at the meeting. But note that in other districts, departments such as building maintenance are located within the school department, so the cost of pensions and health insurance for workers in these areas would be included in the reporting of these districts’ per-pupil expenditures.

3) SELCO cable provides significant network services to the school system but does not charge the school department for most of them. Meanwhile, SELCO had been charging the town $600,000 each year for these services. Either SELCO should charge the school system a similar amount, or the town should allocate at least half of its $600,000 charge to the school department.

4) Cost allocations of post-retirement benefits: Pension and OPEB

For many years the town has been allocating millions of dollars to address its unfunded pension liability, but it has allocated almost nothing to address the unfunded OPEB liability, which is primarily retiree health insurance. But the decision to allocate all of these millions of dollars to pension, and none to OPEB, creates a major distortion in the way these millions of dollars are allocated between the school department and the municipal departments.

The attached Exhibit 2 contains data extracted from the most recent pension and OPEB reports. It shows how the budgeted $5,885,675 pension contribution will be allocated to school and municipal departments in FY16. It also shows that a total Annual Required Contribution of $6,691,122 would be needed if the town were to fund OPEB properly, and shows how it would be allocated to school and municipal departments in FY16.

Note that the pension allocation to the schools (including school lunch) is only 17% of the total, or $985,413. However, the OPEB allocation to the schools would be 71% of the total, or $4,718,702. The illustration shows what would happen if the $5,885,675 currently being applied just to pension were applied proportionately between pension and OPEB. The allocation to the schools would rise from $985,413 to $2,669,405, a spending increase of $1,683,992 that could be reported on the EOYR, resulting in a significant increase in reported per-pupil expenditures.

Town officials may object that they are committed to retiring the pension liability by 2022, but that year is not a state requirement. The town could start allocating to OPEB a significant portion of the $5,885,675 that it is now applying 100% to pensions. A strong argument can be made that this is better accounting.

Some people may argue that there are problems with comparing the data from the pension and OPEB reports, and I have questions too. For example, other than the teachers not being included in the personnel counts on the pension report, what other factors help explain the large difference in total reported personnel counts on the two reports? And what will be the effect of funding a small amount of the OPEB liability from SELCO and the town’s water and sewer departments. But none of these problems and questions will invalidate the key point of this illustration, namely, that more of the expenditures by the town for post-retirement benefits could be, and should be, allocated to the school department, thus increasing reported per-pupil expenditures.

Conclusion:

A thorough study of all spending activity by municipal departments in support of the schools is long overdue. The Finance Committee should insist that town officials conduct one, ensuring that it investigates all of the spending issues outlined above.

John Lukach

Encl: 2 Exhibits

EXHIBIT   1
Illustration: One Method   for Applying Indirect Costs/Overhead
Police Budget  – Recommended FY14
(from Town Manager’s Preliminary Budget Package dated 1/25/13)
Rounded to $000’s
Costs (000) Comments
Total 4,162 Actual was $4,068 per
FY16 Budget Package
Less Total   Base Wages of:
Chief 132 management
5 PAT’s, 1 ACO 246 indirect labor
8 Dispatchers 344 indirect labor
3 Lieutenants 304 management
and Less   Other Expenses:
Operating Expense 279
Equipment 19
Overtime Accts?
Sum 1,324 This is department indirect costs   and
overhead to be allocated
to each  sergeant and patrolmen
Adjusted   Total (Direct Cost Estimate) 2,838
Direct   Cost Personnel Personnel
Sergeants   authorized 6
Patrolmen   authorized 33
Total 39
Avg Total   Base Wages of
Sergeants   and Patrolmen 73 $2,838 divided by 39
plus   Overtime Accts
Overhead   Allocation per 34 $1,324 divided by 39
Patrolmen
Avg Total   Base Wages of 107 This does not include other overhead   costs,
1 Patrolman   plus Dept. such as Pension and Health   Insurance.
Overhead
Cost of 2   Patrolmen
assigned to   Schools 214
Adjustment   for
9 month   school year 0.75 161
Expense   reported per
School End   of Year Report 108
Under-reported   Expense 53     a 33% Under-reporting of expenses in support of
    the schools

(For Exhibit 2 click here Pension and OPEB Liabilities)