July 15, 1999

COLUMBUS - The Cleveland Heights-University Heights (CH-UH) City School District should attempt to improve its financial management while redirecting more funds toward instruction, said Auditor of State Jim Petro today in issuing a performance audit of the district.

"The district has favorable academic performance among Ohio's urban districts, but it hasn't achieved a high level of fiscal accountability," said Petro. "This report can guide the district toward improved financial management and operational practices."

Petro noted that CH-UH ranks higher in state academic standards than most of Ohio's 21 urban school systems, and that auditors found 78 commendable district business practices in operational areas such as several union contract provisions favorable to the district. CH-UH has historically enjoyed voter support and financial stability, maintaining the highest per pupil revenues ($9,853) and expenditures ($9,224) of any urban district (average $7,083 revenues and $7,113 expenditures).

Yet the district projects that deficits as high as $7 million will begin appearing in 2001 without new revenues or spending reductions. Because CH-UH devotes a higher percentage of its funds to non-instructional expenses (46.4 percent) than most urban districts (average 42.4 percent), there is significant opportunity to reduce spending in non-instructional areas. The audit offers 194 recommendations to help CH-UH offset projected deficits and redirect a greater percentage of its funds toward instruction. Some key audit recommendations and commendations include:

• Financial management. Past financial practices such as overspending appropriations, poor budget monitoring and excessive transfers have hindered proper record keeping and board efforts to oversee financial matters. Current accounting practices and software cannot provide accurate financial information, preventing district managers from making informed decisions for daily operations. While CH-UH's interim treasurer is improving the financial management structure, it must continue implementing stronger controls to assure reliable information.

• Procurement. CH-UH makes a consistent effort to pursue lower prices for goods and services under various cooperative arrangements. Yet it needs to pursue greater use of competitive bidding, elimination of direct pays that circumvent encumbrances and other procurement revisions to assure best pricing and objective vendor selection.

• Staffing. Though staffing levels per 1,000 students (144) exceeded the urban district average by 13 percent, CH-UH maintains a lower percentage of teachers (49.5 percent) than most urban districts. It appears overstaffed in certain administrative positions, librarians, grounds keepers, clerical and custodial positions. Establishing staffing levels in these areas comparable to other urban districts and industry standards could save more than $2 million annually, which could be redirected toward instruction.

• Contract provisions. Many union contract provisions are favorable for the district, including a probationary work period for classified employees and flexibility to transfer teachers based on staffing needs. However, provisions such as a generous severance package for unused sick time (current $1.2 million liability); payment of classified employees' share of retirement contribution ($538,000 annual cost) and benefit packages that require no employee premium contributions ($5,191 annual cost per employee) are costly. It should negotiate to provide a better balance between employee benefits and costs to the district.
• Facilities. CH-UH has passed capital improvement levies since 1989, generating $2.5 million annually. While it has developed a commendable five-year capital plan prioritizing needs, it should link this plan to a capacity analysis and future enrollment projections. Current and projected enrollments suggest the district could immediately close one middle school ($680,000 annual savings).
• Custodial/maintenance overtime. CH-UH maintains some of the highest annual overtime costs among urban districts for custodians ($316,000) and tradesmen ($317,000). It should consider options such as establishing a substitute pool for custodians in lieu of offering overtime (up to $55,000 annual savings) and charging rental fees for use of district facilities (up to $32,000 annual savings).

• Transportation. Despite many effective contract provisions with its transportation employees, CH-UH has one of the higher regular transportation costs per student ($399) among urban districts. It should more effectively use technology to design routes to increase the number of students on buses ($33,000 annual savings for each bus reduced).

Auditor of State Jim Petro conducts audits for 4,522 units of state and local government. Petro is committed to cutting costs and reducing fraud, waste and abuse. He has reduced staff by 10 percent, returned nearly $20 million to the state treasury and uncovered hundreds of millions in misspent public funds.

Overview

The Cleveland Heights-University Heights City School District (CH-UH) has enjoyed a stable financial environment the past decade due to above average property values ($112,696 per pupil) and an effective millage (53.9) that is the second highest among all 611 Ohio school districts. Consequently, CH-UH has the highest per pupil revenues and expenditures of Ohio's 21 urban districts. The district has also achieved higher academic standards than most urban districts in Ohio, such as ninth grade proficiency test scores comparable to the state average of all Ohio districts.

However, the district has projected a deficit of up to $7 million by June 2001, which could grow to $35 million by 2003 without changes in revenue or spending patterns. There appears to be opportunity to largely offset these deficits through spending reductions and operational improvements without negatively impacting education, as CH-UH's resources dedicated to direct instruction are four percent less than the urban district average.

The performance audit did note 78 effective and efficient business practices in its review of operations. However, it also offered 194 recommendations to help the district redirect a greater percentage of spending to direct instruction.

Financial system commendations

• Medicaid billing. The district has a well-planned system to capture Medicaid reimbursements for services it provides students, as it received $313,000 in 1998.
• Improved information. The interim treasurer has markedly upgraded the quality and frequency of information provided to budget managers and the board.
• Purchasing coops. CH-UH makes consistent effort to pursue lower prices for goods and services under various cooperative arrangements.

• Revise financial forecast. The district's five-year financial forecast may not properly incorporate spending requirements of recent education reform legislation, and should be revised to ensure an accurate outlook.
• Appropriation overspending. The district should stop overriding flags in the automated accounting systems to prevent overspending of appropriations and not process purchase orders which lack sufficient appropriation.
• Fund transfers. Funds have been improperly transferred between accounts on a regular basis, leaving little integrity in the adopted budget. It must ensure proper transfers.
• Enhancing board role. The board should consider options such as creating a finance committee and outside audit committee to enhance their role in the district's financial operations.
• Procurement revisions. Purchasing policies do not require quotes below $25,000 and "direct pay" purchases (18% of all checks issued in a tested month) violate policies. These and other practices need revision to ensure greater accountability.

• HR department. CH-UH has one of the most effective human resource departments among urban districts, offering a variety of services ranging from extensive career counseling to mediation of employee conflicts.
• Certain contract provisions. Both the teacher and classified contracts contain favorable provisions for the district, including a probationary period for classified employees before they can receive benefits, the ability to place new employees on the salary schedule based on experience, and policies allowing the district to transfer teachers based on staffing needs rather than seniority.

• Administrative, clerical, library staff reductions. Employee/student staffing ratios exceed the urban average by 13 percent, and the same analysis showed administrators exceeded the urban average by 15 percent. It could potentially reduce ten supervisory administrative positions to achieve the peer averages ($766,400 annual savings). Employing the same analysis, it could also reduce eight clerical positions ($207,000 savings) and two librarians ($131,537).
• Benefits. CH-UH's benefit costs per employee ($5,191) exceeds the urban average by 14%, due to factors such as a costly traditional plan and no employee premium contributions. It should consider options like requiring employee contributions on premiums (10% contribution saves $333,000 annually).
• Retirement issues. CH-UH's has a generous severance policy for payout of unused sick time (maximum 92 days), which presents a $1.2 million liability for eligible retirees. It could avoid up to $652,000 in payments by negotiating severance policies closer to state minimum requirements. Given its financial condition, it should also consider negotiating a reduction in the pickup of classified employees' contributions to their pension systems (up to $537,791 annual savings).
• Sick time/leave time. CH-UH spent more than $1.5 million on substitute costs in 1997-98, including an average 7.5 and 9.6 sick days for teachers and classified employees, respectively. It should more aggressively manage and monitor sick leave use through means such as sick leave abuse policies ($50,000 annual savings by reducing sick leave one average day). It should also review the amount of professional leave granted teachers (average 4.2 days) to ensure the benefits of this training outweigh the absence from class.
• Contract issues. Certain issues should be renegotiated, including re-opener clauses contingent on the actions of other districts and minimum staffing requirements.

• Capital plan. CH-UH has a five-year capital plan prioritizing repair needs, and has funded this plan through passing permanent improvement levies generating $2.5 million annually.

• Capacity analysis. CH-UH should link its capital plan to a capacity analysis and future enrollment projections. For example, it is projecting an enrollment decline which could reduce its space usage rate from 80 percent to 70 percent within 10 years. Current and projected enrollments suggest the district could immediately close one middle school ($680,000 annual savings).

• Staffing reductions. CH-UH custodians are responsible for 25 percent less area than higher performing urban districts, and could reduce up to 24 positions to achieve these averages ($793,000 annual savings). It should also consider contracting out grounds keeping duties and save up to $160,000 annually.

• Overtime. CH-UH maintains some of the highest annual overtime costs among urban districts for custodians ($316,000) and tradesmen ($317,000). It should consider options such as establishing a substitute pool for custodians in lieu of offering overtime (up to $55,000 annual savings) and charging rental fees for use of district facilities (up to $32,000 annual savings).

• Preventive maintenance. The transportation department has a preventive maintenance program that thoroughly inspects vehicles every 3,500 miles.
• Contract provisions. CH-UH has effective contracts with bus drivers that save on overtime costs and restricts the domino effect of bumping route assignments when vacancies occur.

• Increase bus capacity. CH-UH has higher regular transportation costs per student ($399) than the urban district average of $373, in part because of low bus capacity levels of 80 students per bus. It should increase capacity by more effectively using technology to design efficient routes ($33,000 annual savings for each bus reduced).
• Staff reduction. CH-UH has a relatively newer bus fleet (average age 4.5 years), though it has higher staffing levels among mechanics than three peer districts used in a comparison. It could reduce staffing to achieve these levels and save $49,000 annually.

• Strategic plan. The district has a detailed, district-wide plan that is being used to guide its technology implementation efforts. Computers are available in specially designed classrooms, media centers and computer labs.
• Year 2000 efforts. CH-UH has taken many steps to address this problem and expects all major technology components to be compliant by the end of July 1999.

• Chief information officer. Since the growth of technology has increased demands for both technical support and management, the district should formally consolidate responsibility for district-wide applications under a senior chief information officer reporting directly to the superintendent.
• Computer user analysis. CH-UH should analyze both the make up and skill level of its computer user population, as well as hardware and software. This could help determine the proper technical support staffing level and organizational structure.