PERFORMANCE AUDIT Scranton School District

PERFORMANCE AUDIT

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Scranton School District

Lackawanna County, Pennsylvania

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October 2017

Dr. Alexis Kirijan, Superintendent Scranton School District 425 North Washington Avenue Scranton, Pennsylvania 18503

Mr. Bob Sheridan, Board President Scranton School District 425 North Washington Avenue Scranton, Pennsylvania 18503

Dear Dr. Kirijan and Mr. Sheridan:

Our performance audit of the Scranton School District (District) evaluated the application of best practices in the areas of finance, safety, and contracts. In addition, this audit determined the District's compliance with certain relevant state laws, regulations, contracts, and administrative procedures (relevant requirements). This audit covered the period July 1, 2012, through June 30, 2016, except as otherwise indicated in the audit scope, objective, and methodology section of the report. The audit was conducted pursuant to Sections 402 and 403 of The Fiscal Code (72 P.S. ?? 402 and 403), and in accordance with the Government Auditing Standards issued by the Comptroller General of the United States. Those standards require that we plan and perform the audit to obtain sufficient, appropriate evidence to provide a reasonable basis for our findings and conclusions based on our audit objectives. We believe that the evidence obtained provides a reasonable basis for our findings and conclusions based on our audit objectives.

During our audit, we found significant instances of failing to apply best practices and noncompliance with relevant requirements, as detailed in our nine findings. A summary of the results is presented in the Executive Summary section of the audit report. These findings include recommendations for the District.

Our audit findings and recommendations have been discussed with the District's management, and their responses are included in the audit report. We believe the implementation of our recommendations will improve the District's operations and facilitate compliance with legal and administrative requirements. We appreciate the District's cooperation during the course of the audit.

Sincerely,

October 24, 2017

Eugene A. DePasquale Auditor General

cc: SCRANTON SCHOOL DISTRICT Board of School Directors

Table of Contents

Page

Executive Summary .................................................................................................................. 1

Background Information ........................................................................................................... 4

Findings ..................................................................................................................................... 13

Finding No. 1 ? Chronic Operating Deficits and a Negative General Fund Balance Have Led the District to Incur Unsustainable Amounts of Debt ............................................................................................... 13

Finding No. 2 ? District Officials and the Board Failed to Perform Their Fiduciary Responsibilities Regarding a $26 Million Transportation Contract That Included Over $4 Million in Questionable Fuel Surcharges over a 10-Year Period ..................................................... 29

Finding No. 3 ? The District's Transportation Expenditures Significantly Exceeded PDE's Final Formula Allowance ....................................................... 46

Finding No. 4 -? The District Incorrectly Reported the Number of Charter School and Nonpublic Students Transported Resulting in an Overpayment of $128,590 ........................................................................................ 54

Finding No. 5 ? For Over Twelve Years, the District Circumvented Payment Procedures, Improperly Provided Health Benefits, and Failed to Issue any of the Required Tax Documents to the IRS for a Mechanic Performing Services as a Non-Employee of the District .......................................................................................... 57

Finding No. 6 ? The District Offered Two Enhanced Retirement Incentives, One with Flawed Language, Both Without a Cost Analysis, Resulting in Increasing General Fund Liabilities ............................................... 68

Finding No. 7 ? The District Continued to Provide Health Insurance to Former Employees After the Employees Failed to Pay Their Premiums ....... 76

Finding No. 8 ? The District Entered Into Two Separatation Agreements With Former Employees That Resulted In Questionable Use of Taxpayer Funds and Possible Inadequate Reporting of Retirement Wages ...... 83

Finding No. 9 ? The District Had Weak Controls over IT Inventory .......................... 90 Status of Prior Audit Findings and Observations ..................................................................... 96 Appendix: Audit Scope, Objectives, and Methodology ........................................................... 101 Distribution List ........................................................................................................................ 106

Executive Summary

Audit Work

The Pennsylvania Department of the Auditor General conducted a performance audit of the District. Our audit sought to answer certain questions regarding the District's application of best practices and compliance with certain relevant state laws, regulations, contracts, and administrative procedures and to determine the status of corrective action taken by the District in response to our prior audit recommendations.

Our audit scope covered the period July 1, 2012, through June 30, 2016, except as otherwise indicated in the audit scope, objectives, and methodology section of the report (see Appendix). Compliance specific to state subsidies and reimbursements was determined for the 2012-13 through 2015-16 school years.

Audit Conclusion and Results

Our audit found significant instances of failing to apply best practices and noncompliance with certain relevant state laws, regulations, contracts, and administrative procedures, as detailed in the nine findings within this report.

Finding No. 1: Chronic Operating Deficits and a Negative General Fund Balance Have Led the District to Incur Unsustainable Amounts of Debt. The District experienced a significant financial decline during our audit period that resulted in a substantial negative General Fund balance which could place the District's future sustainability in jeopardy. We found that the District's General Fund balance

decreased by more than $25 million and that the District had to borrow from other District restricted funds and also had to obtain General Obligations Bonds in order to sustain current operations (see page 13).

Finding No. 2: District Officials and the Board Failed to Perform Their Fiduciary Responsibilities Regarding a $26 Million Transportation Contract That Included over $4 Million in Questionable Fuel Surcharges over a 10-Year Period. The District continues to use the same primary transportation contractor (Contractor) since the 1990s. In the ten school years from 2007 through 2016, the District paid the Contractor $26.1 million. Most striking, however, was the trend of increasing payments during much of that period. The District did not effectively monitor the daily rate or analyze a compounding 4 percent fuel surcharge levied in a 2006 addendum (see page 29).

Finding No. 3: The District's Transportation Expenditures Significantly Exceeded PDE's Final Formula Allowance. The District's transportation expenditures exceeded the Pennsylvania Department of Education's (PDE) "final formula allowance" by more than $11 million during the 2012-13 through 2015-16 fiscal years. We found that the payment structure outlined in the District's transportation agreements were based on a per-vehicle daily rate, which did not align with the mileage calculations that PDE uses to reimburse school districts for transportation expenditures. As a result, the District had to use over $12 million in revenue, in addition to transportation reimbursement from PDE, to pay for transportation expenditures (see page 46).

Scranton School District Performance Audit

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