Audit Finds $300 Million Surplus but Issues Caveat on School Finances

The District government has achieved a budget surplus topping $300 million for a third consecutive year, according to an independent audit that warns the city to address problems in the way the public school system manages its finances.

The findings of the Comprehensive Annual Financial Report for fiscal 2006 come as Mayor Adrian M. Fenty (D) is proposing to take control of public schools and give the D.C. Council line-item control over the schools budget. The council is holding a series of public hearings on the proposal and is scheduled to vote on it in April.

Fenty and Chief Financial Officer Natwar M. Gandhi unveiled the audit at a news conference yesterday. Gandhi said the school system's poor record-keeping, unauthorized overtime and other financial flaws could hurt the city's financial standing. The District, which ran a $518 million deficit in 1996, now has good bond ratings, but the schools' financial troubles could lower those ratings, making it more difficult for the city to borrow money for future capital projects.

"Read between the lines if you want or just have me say it: When we talk about more accountability for this school system, it is not only for programmatic reasons but for financial reasons," Fenty said. "I sat on this council for six years, and I see when the school board comes midyear and says, 'We've overspent our budget; we need more money.' Those days have got to stop."

Council member Marion Barry (D-Ward 8), who supports Fenty's school governance proposal, said the audit findings "bolster our case in favor of the takeover."

Gandhi said that the school system's fiscal problems are not a "novelty" and that they have been heightened by findings of the U.S. Department of Education, which designated the public schools as a "high-risk" recipient of federal funds in April.

The federal agency gave the school district one year to repair its problems. Otherwise, it could lose up to 1 percent of its funding or be required to have an outside agency oversee its $120 million in federal money.

Only American Samoa, Guam, Puerto Rico and the U.S. Virgin Islands have received a high-risk designation.

Trey Ditto, a spokesman for the Department of Education, said that with the one-year deadline approaching, his agency has stepped in to help school officials. "We will submit a formal assessment to see where progress has been and where there hasn't been progress," he said.

The Department of Education has hired Hugh Burkett, a former school superintendent from Washington state, to give technical assistance to the District, the first time the agency has taken such a step, Ditto said.

Although the audit found other problems in the District's overall budget, it concluded that the school system's financial problems are a "material weakness." The audit, which was completed last week by BDO Seidman LLP, is part of the District's annual performance review and precedes the fiscal year budget that will be introduced this spring.

The report was also critical of the city's management of the Medicaid program and its failure to comply with procurement regulations and a law that requires timely payment to vendors.

On a positive note, the financial report shows a hefty $325 million surplus because revenue was 5 percent higher than Gandhi estimated and expenditures were more than 1 percent lower than budgeted.

Council member David A. Catania (I-At Large), who has criticized Gandhi's estimates in the past, said Gandhi's conservative predictions have removed the council from the budget process. The council, he said, is not working with all available funds when it approves the budget each year.

"It's a gamesmanship that I don't like," he said.

Gandhi said he is cautious because the city's revenue is "volatile." He pointed to the 2002 fiscal year, saying the Sept. 11, 2001, terrorist attacks contributed to a $300 million loss in income and sales taxes.

Ed Lazere, executive director of the D.C. Fiscal Policy Institute, a think tank that analyzes city tax and budget issues, agreed that the surplus is no reason for the city to believe it will have extra funds every year, especially with a softening real estate market.

"I don't see it as a sign that the city should be spending more or cutting taxes," he said.