By: Sandra L. Jacques, Esq., LL.M., Assistant Director of Legal Education, Foundation for Educational Administration, sjacques@njpsa.org
School District Business Administrators serve an important, necessary and difficult role in ensuring that a District is fiscally sound, has adequate cash reserves, and is able to remit payment to all those that provide services to and for the District. NJ Statute §18A:12-24 – Prohibited Acts, clearly states that “No school official … shall have an interest in a business organization or engage in any business, transaction, or professional activity, which is in substantial conflict with the proper discharge of his duties in the public interest”.
In recent years, a number of unfortunate situations regarding NJ School Business Administrators have come to light, wherein the Business Administrator’s actions (either intentionally or unintentionally) have caused severe financial difficulties and expenses for their Districts. Examples include owing the IRS over $1 million and/or leaving large financial deficits of millions of dollars in the District’s budget. Additionally, the Business Administrators were disciplined by the School District and most lost their jobs.
This article will address issues regarding those recently publicized situations, as well as a number of applicable oversight considerations for a School District and its Business Administrator, which could potentially prevent such unfortunate situations from occurring in your District. Given that many recent cases that have prompted this article involve ongoing investigation and potential legal action the article does not cite any specific school districts, but rather highlights the types of issues that have arisen in a number of recent situations.
Common Problematic Issues Leading to Financial Mismanagement Allegations
There were three general categories of problematic behavior by the business administrators that emerge in reviewing the recent incidents referenced above: (1) Failure to complete legally required tasks; (2) Inappropriate Expenditure of funds (whether due to negligence or intentional acts); and (3) Bad Judgment.
1. Failure to complete legally required tasks included: Mismanagement of accounts relating to employee payroll deductions (resulting in underpayment to the IRS and penalties); failure to obtain Board of Education (BOE) permission to sever and/or effectuate significant changes to outside service provider/vendor contracts and/or to hire personnel; failure to complete forms and comply with Federal and State agencies’ requirements; and failure to report contracts to the State and County.
2.Inappropriate Expenditures of funds can be broken into two categories – those due to negligence and those resulting in obvious personal financial gain to the Business Administrator. Potential negligence issues included: Unpaid/overpaid/invalid invoices; inappropriately transferring reserve funds to cover other expenses; and failing to:
-
- Complete / Maintain paperwork;
- File quarterly taxes;
- Properly/accurately/timely complete Purchase Orders; and
- Track accurate depreciation values of the District’s owned assets
Although such errors may be attributed to merely making a mistake, at times those actions were actually steps in securing personal financial gain for the Business Administrator. Examples of blatant misappropriation of the District’s funds were accepting unauthorized salary increases and inappropriate sick leave/severance payouts, and “bid rigging” for personal gain for the Business Administrator’s (or a relative or friend’s) “side employment”.
3.Bad Judgment Situations, such as overestimating revenue expectations; overspending; failing to maintain payments for the Business Administrator’s surety bond/insurance; and providing false credentials to obtain employment were also seen in these cases.
When reading the three categories above, you may wonder how those mistakes and/or intentional actions could have occurred, let alone occurred on an ongoing basis, long enough to cause such financial difficulties for the School District. Where was the District’s financial oversight? How much power did the Business Administrator have that would allow them to cause such financial damage? Regardless as to how these financial problems came to be, they caused significant harm to the School Districts.
Common Fallout for the School District Upon Discovery of Financial Issues
The deficits in the districts’ budgets caused by the above-mentioned actions resulted in a myriad of problems. In many cases, district staff positions were either eliminated and/or downsized, which had the domino effect of causing classes to have to consolidate due to fewer staff, and even district building reorganization, due to a financial inability to continue to maintain and operate all of the buildings previously utilized in the impacted districts. In some cases, long scheduled building upgrades and improvements were indefinitely, particularly since maintenance and cash reserves became underfunded.
Many of the impacted districts were inundated with Open Public Records Act requests for documentation and information about their fiscal issues, particularly after the negative publicity and referendums to increase local taxes to make up for the budgetary shortfalls. Boards of Education lost the trust of the public with claims of lack of oversight by the BOE, and a number of board of education members resigned or did not run for re-election.
Further financial complications for the victim Districts centered around obtaining funds to make up for the budgetary deficits. They filed claims with the Business Administrator’s surety bond / insurance companies to recoup losses, which could cause problems finding reasonable, affordable coverage for the next business administrator. Additionally, districts sought State bailouts, and were forensically audited both by their own request as well as a request from the State. As the financial malfeasance became apparent and publicized, the State stepped in and began monitoring and providing oversight of the districts’ finances and procedures.
Common & Potential Fallout for the Business Officials After the Financial Shortfalls Were Discovered
The penalties for Business Administrators found to have mishandled funds in recent years have included being suspended without pay pending further investigation, having Tenure Charges brought against them and/or being terminated from employment with the District. Such a dismissal from employment may ultimately result in the former business administrator’s being eliminated from contention for employment in other districts, loss of their certifications and potential forfeiture (or reduction) of any pension benefits. Civil litigation is also a possible outcome, with potential lawsuits against the former employees by the surety bond companies for indemnification, by the insurance companies involved for subrogation and possibly fraud/illegal acts claims, and/or by the district for claims such as breach of fiduciary duty, fraud and/or unjust enrichment. In such litigation, the former business administrators may be personally liable to pay any funds awarded via settlement agreement or court verdict.
From a criminal law perspective, depending upon the amount of money stolen/misappropriated and the intent of the former employee, charges against the business administrators could include theft, fraud, embezzlement, forgery, or misappropriation of public funds. Convictions or plea deals to any such criminal charges could result in a prison sentence, fines and/or restitution to the district and/or other affected parties.
Using NJQSAC and Ensuring Proper Controls
New Jersey school districts are subject to strict monitoring requirements in all areas of district operations, including fiscal governance, under the New Jersey Quality Single Accountability Continuum. See the NJDOE’s QSAC Manual Fiscal Governance section for additional guidance. When issues arise related to potential financial mismanagement, the NJDOE’s Office of Fiscal Accountability and Compliance may be directed to conduct a formal investigation. The Office of Fiscal Accountability and Compliance acts on the Commissioner’s behalf in the receipt, exchange, review and investigation of information relevant to the efficient supervision of all schools in the state receiving support or aid from federal and state appropriations, N.J.S.A. 18A:423. The office is responsible for all investigative and many auditing functions conducted by the department, as well as criminal background checks of applicants for positions in New Jersey schools.
If OFAC issues a report involving a school district’s fiscal operations, the district is required to take specific actions pursuant to N.J.A.C. 6A:23A-5.6. This includes:
- Discuss the findings of the audit or investigation at a public meeting of the district board of education no later than 30 days after receipt of the findings.
- Within 30 days of the public meeting required at (a) above, adopting a resolution certifying the findings were discussed in a public board meeting and approving a corrective action plan to address the issues raised in the findings, with that corrective action plan then submitted to OFAC within 10 days of adoption by the district board of education.
- Posting the findings of the OFAC audit or investigation and the district board of education’s corrective action plan on the school district’s website.
Avoiding Financial Missteps
When reviewing your district’s forms of oversight regarding budgetary issues, it would be beneficial to consider the following issues:
- What are the district procedures to monitor expenses?
- Are there checks and balances?
- Are procedures clearly outlined and followed?
- Are there clear policies, procedures and requirements regarding expenditures?
- Are there multiple approval requirements for expenditures, especially overruns or unusual payments?
- What role does the Board of Education play in evaluating and monitoring financial data?
- Are there annual audits, or multiple audits in a year when necessary?
- Are documentation procedures and requirements defined and adhered to?
- Is paperwork completed properly and in a timely manner?
- Are all agreements in writing, rather than being “handshake” and/or verbal agreements?
- Are formal, written contracts completed for every outside contractor?
- Are procedures followed regarding required notifications and submissions to government agencies?
- Are taxes properly and timely prepared and paid?
- Additional Considerations
- Recognize that fiscal governance is a shared responsibility that involves many key players and guard against excessive control of information, oversight and approval authority by one person (i.e. – the business administrator);
- Maintain public trust and support by ensuring transparency regarding district finances;
- Provide annual training on School Ethics requirements for the Business Administrator’s Office, board of education members and other school leaders;
- Require ongoing professional development Training for business administrators, allowing them to stay current with new laws, procedures, and requirements;
- Support business administrators’ attendance at networking events;
- Ensure there are procedures to confirm the background checks, credentials and/or resumes of potential and current business administrators; and
- Ensure that the district has engaged in due diligence in faithfully implementing all statutory and regulatory requirements related to fiscal governance and when necessary fully complies with all requirements related to investigations and oversight from OFAC.
Conclusion:
The majority of school business administrators are ethical, hard-working people, that successfully maintain fiscal stability for their districts. Unfortunately, as in any profession, there are those that are not worthy of working for a school district in this capacity, whether it is because of incompetence, negligence, or bad intentions. When something goes wrong, particularly when it involves large, often multimillion-dollar losses for a district, the bad acts of the few become highly publicized and scrutinized by the public and state officials. It is imperative that districts and business administrators preemptively act in an attempt to avoid such mistakes/malfeasance, and that they quickly work to correct discovered mistakes in a timely and legal manner, while striving to improve and modify district procedures to avoid having the same problems reoccur in the future.