UPDATE 3/31/2014: The misleading reporting issue that is the subject of this post was largely corrected by District 15 starting with financial reports issued in March 2014. For financial reports issued from October 2013 through February 2014 you would need to carefully consider the impact of the double-counting issue noted here for District 15 revenue and expenditures.
District 15 started publishing misleading financial information this month.
The problem is caused by including transfers between funds in total Expenditures and Revenues, which results in both Expenditures and Revenues being overstated.
The impact of the problem can be seen in two main areas. First, it distorts both revenue and expenditures, which makes year-to-year comparisons invalid. Following are the expenditures as reported by District 15 in the 5-year forecast presented this month along with the corrected amounts. This mistake is most obvious in 2013/14 where Expenditures are overstated by $8.9 million.
|TOTAL EXPENDITURES ($ millions)|
|2011/12 Actuals||2012/13 Actuals||2013/14 Forecast||2014/15 Forecast||2015/16 Forecast||2016/17 Forecast||2017/18 Forecast|
|Incorrect District 15 Totals||$140.6||$145.3||$158.1||$151.2||$154.1||$156.3||$160.5|
|% Change vs. Prior Year||+3.3%||+8.8%||-4.3%||+1.9%||+1.4%||+2.7%|
|% Change vs. Prior Year||+2.1%||+4.2%||-0.2%||+1.9%||+1.5%||+2.7%|
Second, the incorrect calculation of total expenditures affects the Fund Balance % of Expenditures calculation. This ratio is used by the Board to evaluate whether there is a sufficient fund balance to weather any financial surprises. The numbers presented by District 15 are shown below along with the correct numbers.
|FUND BALANCE % OF EXPENDITURES|
|Incorrect District 15 Calculation||39.5%||39.3%||33.9%||34.8%||34.2%||34.5%||33.9%|
I am publishing this information because of the importance of adhering to accounting principles for financial reporting, particularly from the perspective of accurately communicating information that is used for decision making by the Board. The Board uses this information for decisions on property tax levies, budgets, capital project funding, etc.
It is also important that financial reporting standards be followed from the perspective of District 15′s credibility in explaining financial decisions.
I reported this mistake to Superintendent Scott Thompson as shown in the email below before the last Board meeting. His initial response was that he wanted this to be as clear as possible. But then a few hours before the Board meeting he informed me that he decided to go forward with the incorrect method of calculating Fund Balance % of Expenditures. This new Administration practice distorts key financial information including revenues, expenditures and fund balances as a percentage of expenditures.
From: Scott Herr
Sent: Monday, October 07, 2013 9:59 AM
To: Scott Thompson
Cc: Michael Adamczyk
Subject: Mistake in Fund Balance % of Expenditures Calculation
I wanted to alert you to a mistake in the “Fund Bal % of Expenditures” calculation due to double-counting as expenditures both transfers out of funds and also the actual expenditures in the transfer-to fund.
The consolidated revenues and expenditures page is also misleading in that Total Expenditures show both actual expenditures and also the double-counted transfers out. This is also true for revenues.
This problem has occurred in the past so I wanted to elaborate on this a bit. The standard practice is not to count interfund transfers as either revenue or expenditures. You can see this standard practice in the Annual Financial Reports that the District files with ISBE. The AFR financial statements are broken into three parts: “Receipts/Revenues,” “Disbursements/Expenditures,” and “Other Sources/Uses of Funds”. Transfers into and out of funds are categorized into “Other Sources/Uses of Funds” and not as revenue nor expenditures.
As a simple example, let’s say someone transfers $20,000 from a savings account to a checking account and then writes a check for $20,000 to buy a new car. It wouldn’t be correct to say that you’ve spent $40,000 (the $20,000 transfer out plus the $20,000 check). The transfer is simply moving money from one fund to another and isn’t an expenditure.
I’ve copied Mike on this because I understand that you are at jury duty and wanted him to be aware in case he wants to correct this before the packet is posted on the website.