The Warwick Valley Central School District (District) is governed by the Board of Education (Board) which comprises nine elected members. The Board is responsible for the general management and control of the District’s financial and educational affairs. The Superintendent of Schools (Superintendent) is the chief executive officer of the District and is responsible, along with other administrative staff, for the day-to-day management of the District under the direction of the Board.

The District employs approximately 800 employees, including substitutes, and its total payroll costs were $34 million during the 2005-06 fiscal year. The senior payroll clerk is responsible for processing the District’s biweekly payroll.

The voters rejected the Board’s 2005-06 budget proposal twice, which forced the Board to adopt a contingency budget. The voters also rejected the Board’s 2006-07 budget proposal, and the Board adopted the contingency budget for the 2006-07 fiscal year without putting the budget out for a second vote. A contingency budget funds only teachers’ salaries and those items the Board determines to be “ordinary contingent expenses.”

The Board negotiates employment contracts with District employees that set the employees’ compensation and benefits, such as health and life insurance.

Scope and Objective

The objective of our audit was to examine the District’s internal controls over selected financial operations for the period July 1, 2005 to November 21, 2006. We expanded the scope of the audit to review the District’s inter-fund transfers and workers’ compensation fringe benefit payments. Our audit addressed the following related questions:

• Is the District in compliance with budget regulations?
  
  
• Were fringe benefit payments to the former Superintendent made in accordance with his employment contract?
  
  
• Are internal controls over payroll appropriately designed and operating effectively to adequately safeguard District assets?
  

Audit Results

During the fiscal years July 1, 1990 through June 30, 2006, the Board transferred approximately $10.2 million from the general fund to an unauthorized health and safety account without required voter approval. Of the $10.2 million, District management spent approximately $7 million on capital expenditures, again without required voter approval. In June 2006, District voters did approve a $3.2 million transfer from the health and safety account to the general fund to set up a valid capital reserve.

District management did not pay the former Superintendent’s fringe benefits according to the terms of his employment contract. The former Superintendent’s employment agreement states that the District will pay for the premium of a “term life insurance” with a face value equal to three times his annual salary plus an additional sum of $1,400 annually. However, we found that for six years, District management paid premiums for life insurance contracts on the behalf of the former Superintendent that totaled $120,373 for a “variable life insurance” policy with an undetermined cash surrender value, instead of term life insurance. We determined that the premiums for “term life insurance” for the same period would have cost the District $24,000. Therefore, the District overpaid the life insurance benefit for the former Superintendent by $96,373.

The Board’s policy for workers’ compensation reimbursement violates Workers’ Compensation Law by allowing District employees who are not working due to on-the-job injuries to retain their workers’ compensation award while also being paid by the District for being out on sick leave. As a result, the District paid a total of $12,617 to 10 employees for workers’ compensation reimbursements, when they had already been compensated for their absence by using their sick days. Also, the District’s senior payroll clerk performed many incompatible duties when processing the District’s payroll. In addition, we found that because the District’s finance software’s payroll module is not access controlled, four individuals have unauthorized access to payroll functions, and a clerk had access to payroll data that was not compatible with her job duties.

Comments of District Officials

The results of our audit and recommendations have been discussed with District officials and their comments, which appear in Appendix A, have been considered in preparing this report. Except as specified in Appendix A, District officials generally agreed with our recommendations and indicated they planned to take corrective action. Appendix B includes our comments on the issues raised in the District’s response letter.