How much is the total school deficit?
The School Department deficit for fiscal year 2008 totals $4.7 million dollars. This is a result of $1.8 million dollars in prior year 2007 expenditures that were paid by the former School Business Manager out of this 2008 fiscal year’s revenues, thus creating a $1.8 million dollar shortfall to deal with this year’s needs. In addition, the budget presented to the School Committee for this fiscal year did not include $2.9 million dollars of expected expenditures. In essence, the $43 million dollar fiscal year 2008 budget presented to and approved by the School Committee did not contain enough money to meet the district’s current spending patterns. The majority of these shortfalls occurred within Special Education expenses, even though Special Education personnel provided accurate budget
projections to the former Business Manager. To date, the City and Schools have collectively absorbed (through a combination of new revenues and cuts) a total of $3.5 million dollars. However, in order to close the remaining $1.2 million dollar deficit, reductions in personnel were necessary.
How did this occur?
It is fair to say that the School District would not be in this position but for the actions of one person, the former School Business Manager. The deficit came without warning and the City’s audit firm has uncovered a number of intentional acts by the former School Business Manager aimed at deceiving the School administration, School Committee and City Council. These acts include, but are not limited to, concealing prior negative end-of-year School Department audits; overriding the municipal accounting software system (MUNIS) to pay expenditures without sufficient revenues; paying prior year bills with revenues from the current fiscal year; providing fraudulent financial reports and statements on both a monthly and annual basis to both the School Committee and City Council. Simply put, the former
Business Manager paid bills from last year with this year's money ($1.8m) and prepared a budget for this year that was severely underfunded ($2.9m).
How could this occur without the School Committee's knowledge?
Despite the diligent efforts of the School Committee, ultimately the body relies on the School Business Manager and the School Superintendent to provide regular updates and information on the state of school finances. The School Committee Policy Manual dictates the delivery of monthly finance reports and requires timely notice to be provided of any school accounts in deficit or projected to be in deficit. In the present case, neither the former School Business Manager, nor the former School Superintendent, provided any indication of potential or actual fiscal woes. Rather, monthly reports indicated a small surplus ($145,000) was expected at the end of fiscal year 2007 - not a $1.8 million dollar deficit. As for the shortages in the current budget, each Spring the School Committee holds budget
meetings to review the proposed budget submitted by the School Superintendent and Business Manager. This year's $43,040,189 budget was reviewed in earnest with school officials and school principals through a series of meetings on a department wide basis. With the exception of a few revenue neutral amendments, the budget proposed by school officials was approved as submitted. The adopted budget was then forwarded to the City Council for final review and approval. Throughout that process, no member of the School Department ever indicated that the budget as submitted lacked sufficient resources to cover known expenses this fiscal year. We now know that despite the fact that the adopted budget represented a 2% increase over the prior year, there were several known expenditures (e.g. teacher payroll, special ed out of district tuition, special ed transportation, etc.) that were not included in the budget.
How come this was not caught by the city’s auditors?
In fact, the findings related to the $1.8 million dollars in fiscal year 2007 expenditures carried into fiscal year 2008 were not missed by the auditors and will be included as part of the final year end audit report. The annual audit conducted by the City’s independent auditors, Powers and Sullivan, was in the process of being completed when the current situation came to light. Moreover, the annual audit conducted by Powers and Sullivan is a financial statement audit. As such, the auditors do not review every transaction and expenditure, but rather review sample entries in the account ledger system to make sure that expenditures are accurately tied to revenues and that everything balances out. This is the normal scope of services for annual audits which are statutory and performed throughout
the Commonwealth in every city/town. As for the fiscal year 2008 budget shortages, the auditors will not commence work on this audit until the end of the fiscal year.
How come this was not caught by city finance officials?
Under State Education Reform legislation, the School Department receives a lump sum budget approval at the beginning of the fiscal year. There are no routine line-item reviews or reports by city finance officials, as there are with municipal budgets such as Police, Fire and DPW. Rather that is the purview of the School Committee and School Superintendent, and regular reports are provided by the School Business Manager. In the current case, the School Business Manager provided false reports and misrepresentations of financial data to the School Superintendent and School Committee, as well as the City Council. Moreover, when questioned about any finance matters, he provided plausible responses. Lastly, his prior experience as City Finance Director provided him with the knowledge and insights to manipulate the system in such a manner that would not be easily detectable.
Why was the former School Business Manager retained by the School Department, especially following the earlier fiscal crisis which occurred shortly after he left his position as City Finance Director?
The former School Business Manager had a three year contract with the School Department that ended on September 30, 2007. He left his position due to the fact that his contract was not renewed by the School Committee. Despite public and private reservations expressed by the Mayor and some members of the School Committee, Mr. Guy had the support of a majority of the School Committee, as well as the previous School Superintendent, Dr. Larry Callahan. In fact, in June, 2007, Dr. Callahan gave the former Business Manager an extremely favorable evaluation which was presented to members of the School Committee. This favorable evaluation, coupled with the fact that none of the present material findings came to light until after his contract expired, enabled Mr. Guy to retain his position.
When did you learn of the deficit and when was the public informed?
Within weeks of Mr. Guy’s September 30th departure, the interim School Business Manager uncovered several financial discrepancies. City finance personnel were called in to work with the interim School Business Manager to confirm and identify the extent of District’s financial hardship. After confirming the amount of the prior year expenditures paid out of the current fiscal year, finance personnel began to assess the current fiscal year budget. It was clear that $1.8 million dollars would impact this year’s budget, but it also looked as though there were other shortages. Members of the School Committee, School Department staff, and the press were informed of these early findings the first week in November. From that point forward, municipal finance personnel,
working closely with the new School Business Manager (who started Dec. 3rd ), as well as the Superintendent, Mayor, school staff and the independent auditors, all worked diligently to quantify the projected expenditures needed to complete the fiscal year. The problem to be solved was not simply projecting known existing costs through June 30 and contrasting those numbers with what has been budgeted, but it also entailed estimating what could be saved, deferred, or renegotiated in FY 2008, effectively shrinking the problem by reducing the costs to be paid through June 30.
Who is responsible for this deficit?
Certainly the School Committee and the Administration share a degree of blame for not identifying Mr. Guy's actions or misrepresentations sooner, however without the intentional actions of one person-the former School Business Manager-none of the current hardships would be occurring. Making up a deficit is much more difficult mid-way through the fiscal year. Had the underfunded budget items come to light during preparation and review of the annual budget this Spring, it would have been much easier to manage given that we would have had twelve months to exact savings and the displacement of staff in the middle of the school year would not have occurred. Moreover, the actions of the former School Business Manager do not appear to be mere incompetence or honest mistakes, rather the level of intentional
deceit followed by acts aimed at covering up these misdeeds appears to be a pattern. As such, the City will be pursuing both criminal prosecution and civil action against the former Business Manager.
Do we believe that any School Department funds were misappropriated for personal gain?
There is no indication that any funds were diverted for non-school purposes or personal gain. All expenditures appear to be tied to actual school expenses. Completion of the final audit report will be able to confirm this initial finding.
How come we can not simply borrow the money we need to get through the fiscal year?
Cities and towns are not permitted to borrow funds to meet unfunded general operating expenditures. The only way a city or town could receive any such assistance would be via special state legislation that would require the approval of the Department of Revenue and include the formation of a financial control board. In all likelihood, even if such a move were to be pursued, the state would likely require that the contemplated reductions take place.
How were the reductions apportioned amongst the schools? Were administrative and non-classroom functions included in the reductions?
Every attempt has been made to limit impacts on classroom instruction. Of the $4.7 million dollar shortfall, $3.5 million has been absorbed by the city and schools via new revenues, reductions and renegotiation of contracts, leaving $1.2 million that would largely come from personnel cuts. Each school and the administrative office was apportioned a share of the $1.2 million dollars on an adjusted pro rata basis tied to each school's annual budget sum. Principals were given the unenviable task of identifying specific cuts. Every school and administrative offices experienced reductions. In total, there were 16.4 teacher reductions among the seven elementary schools; 5.5 at the middle school; and 10 at the high school.
Are other areas of the City budget being reduced to help with this situation?
Yes, the Schools and the City have worked jointly to reduce costs and raise revenues to confront the current deficit. The City has put in place a spending freeze on any non-essential items and a number of cost items have been shifted to the city side of the budget.
Why would you enter into a new contract with the teachers union at the same time you are making cutbacks in the schools?
The agreement adopted by the School Committee and the Teachers Union was approved following nearly 18 months of negotiations. Due to the current fiscal constraints, the Union agreed to defer payment of any raises until the next fiscal year, thereby eliminating impacts associated with the new contract this year.
How will the deficit impact classroom instruction in the Salem Public Schools district?
While we have done everything we can to limit the impact on classroom instruction, we could not avoid displacement of some classroom teachers. Given the success of fundraising initiatives to date, we are hoping to reverse classroom impacts. Fortunately, SPS has been able to operate with relatively low class settings, so while class sizes will grow, they will be well below contractual requirements.
How can we be sure that a situation like this won’t occur in the future?
It is important that we collectively review our school and city financial functions and put in place additional controls aimed at improving oversight. One item currently being considered is the consolidation of administrative functions, including finances, between city and schools. That would be a good first step, along with greater transparency in budget reporting. This effort has already been undertaken by the new School Business Manager. Furthermore, new financial controls have been implemented on the City side to ensure that further reviews of financial transactions of the school system be administered prior to processing any invoices, booking any receivables, and transferring funds between accounts. Finally, we will take seriously any recommendations contained within the expanded audit
to ensure that a situation like this never occurs in the future.
How can I help?
A number of parents and community stakeholders are actively working on plans to raise funds to help curb the deficit. To date, over $200,000 has been raised through contributions to the Salem Education Fund. Additional information on the Fund is listed below. In addition, with the reduction in force any time you could provide assisting with school and classroom operations would be appreciated. The best way to learn more about what is needed is to talk with your child’s teacher or principal about how best you can help within your particular school setting.
If I have further questions or concerns, whom should I contact?
If you have further questions, please feel free to contact any one of the following individuals below. Contact information for all are listed here.
School Superintendent Bill Cameron
Mayor Kim Driscoll
School Committee Members
Dr. Brendan Walsh, Vice Chair
Nate Bryant
Kevin Carr
Dr. Janet Crane
James Fleming
Kerry Martin
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