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SUMMARY
The Office of the Auditor General has conducted a performance
audit and sunset review of the Arizona School Facilities Board (SFB), pursuant
to a May 22, 2006, resolution of the Joint Legislative Audit Committee. This
audit was conducted as part of the sunset review process prescribed in Arizona
Revised Statutes (A.R.S.) §41-2951 et seq.
The Legislature created the School Facilities Board in 1998
through legislation known as Students FIRST (Fair and Immediate Resources for
Students Today). Students FIRST changed the way Arizona funds kindergarten-
through 12th-grade (K-12) schools by establishing minimum adequacy guidelines
for facilities to meet and providing state funding to ensure all school
districts’ facilities comply with the guidelines. Previously, Arizona’s school
construction funding system relied on property taxes and bonding. As a result,
monies available for capital facilities depended on a district’s property
wealth, and the quality of facilities varied greatly within the State, with some
buildings being unsafe, unhealthy, and in violation of building fire and safety
codes. In 1994, the Arizona Supreme Court ruled on a 1991 lawsuit and declared
that Arizona’s system of school capital finance did not conform to the State’s
Constitution, which requires the Legislature to enact laws to provide for the
establishment of a general and uniform public school system. Students FIRST was
enacted in response to the court ruling.
SFB is responsible for establishing minimum adequacy
guidelines and managing four funds to ensure that school facilities and
equipment meet the guidelines. Specifically:
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The Deficiencies Correction Fund provides funding
to school districts to bring their facilities up to the established minimum
adequacy guidelines. Statute required all deficiencies to be corrected by
June 30, 2006. According to SFB’s Executive Director, as of June 2007, only
one district was still working to finish its deficiency projects. As of
April 10, 2007, SFB had expended approximately $1.3 billion from this Fund.
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The New School Facilities Fund provides
kindergarten- through 12th-grade school districts with monies to purchase
land and build new school facilities to accommodate student enrollment
growth. As of June 7, 2007, SFB had awarded 328 new school projects with a
total value of approximately $2.78 billion, and as of May 31, 2007, it had
distributed $1.9 billion in progress payments to districts for their
projects.
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The Building Renewal Fund provides school
districts with monies to help them maintain the adequacy of existing school
facilities. In fiscal year 2006, SFB distributed $71.3 million to districts
from this Fund.
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The Emergency Deficiencies Correction Fund
provides school districts with monies to help them manage needs that
threaten their functioning, preservation or protection of property, or
public health, welfare, or safety. From fiscal years 1999 through 2006, SFB
awarded 14 emergency correction projects with a total value of $8.4 million.
Future new school construction costs will place
increasing demands on General Fund
(see pages 15 through 22)
Arizona’s choice to pay for new school construction from the
General Fund makes it particularly important for the Legislature to be aware of
projected new school facilities construction costs. The New School Facilities
program provides K-12 school districts with monies to purchase land and
construct new school facilities to accommodate student enrollment growth. Rising
construction costs and rising student enrollment are projected to create a need
for new construction expenditures totaling $2 billion to $2.4 billion between
fiscal years 2008 and 2012. Under the current funding mechanism, the total
amount will have to come from the General Fund because other sources of revenue
used in previous years will be exhausted by fiscal year 2008.
Further, SFB’s interpretations of minimum adequacy guidelines
will potentially increase the impact on the General Fund under the current
funding mechanism. A.R.S. §15-2041 allows SFB to distribute money in excess of a
statutory formula amount to accommodate inflation, based on an index identified
by the Joint Legislative Budget Committee (JLBC), and other specified factors.
SFB's additional awards totaled $31.8 million in fiscal year 2007. Although SFB
staff explained that the awards are necessary to allow districts to build
schools comparable to those built in previous years, the additional awards are
not based on an inflationary adjustment allowed by statute and therefore may
exceed SFB's statutory authority. To determine if its actions are within the
scope of its authority, SFB should seek a formal Attorney General opinion and
then follow the Attorney General's advice.
Building renewal formula may need modification
(see pages 23 through 30)
The Legislature should consider modifying the school district
building renewal funding formula to help districts better manage their building
renewal monies. The Legislature has not used the formula to determine funding
levels in recent years and has several times passed bills with changes designed
to make the formula more workable. The Governor has vetoed these changes, citing
concerns from a pending lawsuit, which awaits a final court order. In June 2007,
the Legislature established a task force to review and make potential
recommendations to change the building renewal formula.
Formula-based amounts for fiscal years 1999 through 2007
would have totaled $1.2 billion, but actual appropriations totaled $606.8
million. Modifying and using the formula would help make funding more
predictable for school districts. In the past, modifications studied and
proposed included changing how older buildings and portables are treated,
changing how replacement value is determined, and revising the assumptions for
determining cost per square foot. Even without full formula funding, some
districts have accumulated large balances of renewal monies, but district
officials reported that the monies are needed for large future projects and to
compensate for funding fluctuations. Although most districts’ balances are
$250,000 or less, six districts have accumulated balances between $3 million and
$8 million.
The statutorily prescribed formula, based on a well-known
formula created by two facilities management experts, is used by other Arizona
agencies, and the Legislature has studied its use for those agencies. In 2000, a
Joint Legislative Study Committee examined the formula’s use for the Arizona
Department of Administration, the Board of Regents, and the Department of
Transportation, and found that the formula provides adequate support for state
building renewal needs and should be adequately funded to avoid long-term costs
of deferred maintenance. However, the study did not examine the formula’s use
for school districts.
SFB should improve oversight of districts’
use of building renewal monies
(see pages 31 through 36)
SFB should improve its oversight and reporting of Building
Renewal Fund expenditures. As prescribed by statute, Building Renewal Fund
monies are restricted for specific purposes. To comply with reporting
requirements, districts must submit two building renewal reports to SFB every
year: a plan and an expenditure report. The plan includes a list of projects and
their expected costs for each school in the district. SFB staff review the plans
to ensure the planned projects meet statutory requirements and estimated costs
appear reasonable. SFB staff did not start reviewing the expenditure reports in
depth until the Office of the Auditor General began this audit. According to SFB
management, there has always been some level of review of building renewal
expenditures, but they were not able to provide evidence of their review or
extent of it.
Both auditors and SFB staff identified instances of school
districts inappropriately using building renewal monies. Based on their
descriptions in districts’ fiscal year 2005 expenditure reports, 193
expenditures totaling approximately $4 million of the $40.6 million reported
expenditures appeared to be potentially inappropriate uses for building renewal
monies. For example, the reports showed expenditures for new construction, land
improvements, and irrigation. Based on an in-depth review of 8 of the 193
expenditures, auditors determined that 6 of the 8 expenditures did not meet
statutory criteria for approved uses of building renewal monies. Auditors also
identified inappropriate building renewal expenditures in a review of
expenditures reported in the Annual Financial Reports (AFR). Based on their
descriptions in the reports, approximately $8.8 million of the $44.2 million
reported expenditures appeared to be potentially inappropriate uses of building
renewal monies. Based on an in-depth review of expenditures submitted by three
school districts, auditors determined that some expenditures did not meet the
statutory criteria for approved uses of building renewal monies. Although many
of these expenditures may be appropriate, SFB staff can only speculate whether
they are appropriate until they analyze them.
Although SFB staff, during the audit, began evaluating
expenditures for appropriateness, they have not yet developed a standard process
for this review. In addition, SFB has never reported inappropriate expenditures
to the Superintendent of Public Instruction, as required by statute. Because the
Superintendent would be required to withhold other monies until the
inappropriate expenditures were repaid, the Executive Director does not believe
it would be fair to report them without a process for the districts to challenge
SFB staff’s findings. SFB should develop and implement policies and procedures
for its staff to review expenditure reports, allow districts to challenge its
findings, and report inappropriate expenditures to the Superintendent of Public
Instruction.
Controls should be improved to ensure
monies paid out appropriately
(see pages 37 through 41)
Although SFB has some good practices to help ensure that it
appropriately manages payments for school districts’ projects, it lacks a
complete system of internal controls. SFB, one of the State’s highest recipients
of legislatively appropriated monies, pays out hundreds of millions of dollars
each year for districts’ projects. SFB has developed some good practices, such
as requiring supporting documentation from districts to support the amounts
requested and separating duties so that different employees prepare, enter, and
approve payments on the State’s accounting system. According to SFB’s executive
director, SFB staff reconciled payments data in the SFB’s project-tracking
database to the payments recorded in the state-wide accounting system. However,
until December 2004, SFB did not retain evidence of these reconciliations.
Further, SFB lacks written policies and procedures to help ensure its practices
are followed consistently, and does not always use its close-out procedure,
which is one of its best controls, for all projects. As a result, it has made
some overpayments. Specifically, 31 out of 530 projects for the period June 1999
through November 2006 had negative balances totaling $1.7 million, indicating
that expenditures may have exceeded awards. In a review of 11 of these projects
that had negative balances totaling approximately $1.5 million, auditors found
most negative balances resulted, in part, from recordkeeping errors, but SFB had
made overpayments totaling $63,200 for 4 projects. SFB should take steps to
improve its internal control policies and procedures to help ensure payments are
appropriate.
Database controls need improvement
(see pages 43 through 50)
In addition to improving its overall internal control
framework, SFB needs to improve controls over its project-tracking database. SFB
relies on the database to help manage its payments and track project
information. As a result, controls are important to ensure the data is secure
and reliable. However, SFB lacks some important controls, such as unique
passwords for different users, and automated edit checks to ensure payments do
not exceed approved amounts. A comparison of SFB practices to the
internationally recognized COBIT® guidelines for information systems found that
SFB only partially addresses the guidelines.
These weaknesses appear related to SFB’s lack of adequate
oversight of IT resources and to a contract that delegates too much authority to
SFB’s IT consultant. SFB needs to take several steps to improve its IT controls
to help ensure schools are paid appropriately and to improve the data it uses
for budgeting purposes. Specifically, SFB should improve security measures,
establish written policies and procedures, and develop a formal training
program. SFB should also develop and test its business continuity plan. In
addition, it should modify its consultant contract to specify documentation and
security requirements and to establish state ownership of the project-tracking
database. Finally, it should consider the best method to meet its IT needs
through the use of consultants or in-house resources.
Other Pertinent Information
(see pages 51 through 53)
As part of the audit, auditors gathered other pertinent
information regarding the Board’s awards of monies for school districts’
emergency deficiency correction projects. The Legislature established the
Emergency Deficiencies Correction Fund to help districts manage serious needs in
excess of their current budgets. SFB has awarded 14 projects totaling
approximately $8.4 million to districts since its inception in fiscal year 1999.
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