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Harford schools continue deficit spending, latest audit discloses

Harford County's public school system continues to operate with a recurring deficit, prompting yet another warning from its chief financial officer that the situation can't continue.

HCPS operating expenditures once again exceeded revenues, according to the system's latest comprehensive annual financial report released this week.

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The recurrence of such an operating shortfall, typically known as a structural deficit, in 2013-14 school year resulted because although HCPS spent less on operations than it did the prior year, incoming revenue was still not sufficient to cover the year's expenses.

To offset the shortfall, HCPS dipped into a fund balance, or reserve, built up in prior years when revenues exceeded expenditures. But, the system is approaching the point where that balancing act won't be possible, school board members were told Monday.

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"This structural deficit is eating away at the fund balance," James Jewell, assistant superintendent for business services, said. "You are getting close to the point where there is no more."

The 2013-14 financial report states HCPS received $482,121,946 in general fund operating revenues to cover such activities as classroom instruction, special education instruction, textbooks and other instructional costs, administration, health services, pupil transportation and operation and maintenance of its 53 school buildings and other facilities.

According to the report, which was prepared by the HCPS finance department in cooperation with the auditing firm SB & Company LLC of Cockeysville, total general fund expenditures for the same period were $483,503,940, leaving a net shortfall of $1,381,994. The previous year, revenues totaled $485,101,307 and expenditures totaled $487,288,966, for a net shortfall of $2,187,659.

The school system has been buffeted by revenue issues at both the state and county levels, and the report noted school officials have little control over how much they will receive from either source from year to year.

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In 2013-14, county revenue increased by about $1.5 million to $221.3 million; however, general state revenue declined by more than $5.1 million, to $222.4 million.

In recent years, school officials have requested tens of millions of dollars in revenue increases from Harford County's county executive and county council, requests that for the most part were rebuffed. As a result, spending increases have been pared accordingly.

In an effort to avoid a repeat in the current budget covering the 2014-15 school years, expenditures were reduced as much as possible and adequate funding was requested from county and state officials, Jillian Lader, HCPS director of communications, said.

Jewell has warned previously that the system can't continue relying on fund balance drawdowns to even out the budget.

Although the financial report states the fund balance was about $21.4 million at the end of the 2013-14 school year, Jewell said only about $3 million is unassigned.

According to the financial report, more than $5 million was used as revenue for the 2014-15 budget, $8 million was set aside as a hedge against future health insurance rate increases caused by catastrophic claims and more than $3 million was encumbered for a reserve to pay outstanding bills.

Contract issue

In its audit of HCPS finances, SB & Company found everything generally in order with one exception.

The auditing firm in its review stated the school system had failed to provide a copy of a contract with an unnamed vendor, nor was the auditing firm able "to obtain evidence that HCPS verified whether the vendor was suspended or debarred" from receiving a contract, as required under federal regulations.

The auditing firm's report states that it independently verified the vendor was not suspended or debarred.

"We noted that it is HCPS's policy and procedure that for transactions with vendors over $25,000, there should be a formal contract with the vendor, which includes clauses required by Federal statutes and clauses verifying the vendor is not suspended or debarred," the auditing firm wrote. "However, in this instance, an official contract was not otherwise available. The amount expended to the vendor was $49,754.

According to the report, because HCPS did not have evidence it had entered into an official contract and did not verify the status of the vendor, "HCPS does not have adequate assurance that the procurement, suspension and debarment requirement is performed and determined."

The auditing firm recommended the school system "establish procedures to ensure its policy related to procurement contracts are consistently followed and that they sure they maintain adequate documentation to support that vendors are in compliance with established Federal regulations..."

According to the report, HCPS agrees with the finding and will "work to strengthen adherence to current procedures to ensure that all contracts over $25,000 are reviewed by the Purchasing Department."

Bill Seymour, an SB partner, said the problem was a "procedural issue, an isolated incident but one we are required to report." No further action was recommended, and school board members did not comment on the finding.

The contract in question was with Danielson Group through the HCPS Professional Development Office, Lader said. The total cost was $63,750 and was a requirement within Race to the Top program's federal funding, she explained.

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