Performance audit and sunset review, Arizona School Facilities Board

              Debra K. Davenport
Auditor General
Performance Audit and Sunset Review
Arizona School
Facilities Board
Performance Audit Division
AUGUST • 2007
REPORT NO. 07-06
A REPORT
TO THE
ARIZONA LEGISLATURE
The is appointed by the Joint Legislative Audit Committee, a bipartisan committee composed of five senators
and five representatives. Her mission is to provide independent and impartial information and specific recommendations to
improve the operations of state and local government entities. To this end, she provides financial audits and accounting services
to the State and political subdivisions, investigates possible misuse of public monies, and conducts performance audits of
school districts, state agencies, and the programs they administer.
The Joint Legislative Audit Committee
Audit Staff
Copies of the Auditor General’s reports are free.
You may request them by contacting us at:
Office of the Auditor General
2910 N. 44th Street, Suite 410 • Phoenix, AZ 85018 • (602) 553-0333
Additionally, many of our reports can be found in electronic format at:
www.azauditor.gov
Senator Robert Blendu, Chair Representative John Nelson, Vice-Chair
Senator Carolyn Allen Representative Tom Boone
Senator Pamela Gorman Representative Jack Brown
Senator Richard Miranda Representative Peter Rios
Senator Rebecca Rios Representative Steve Yarbrough
Senator Tim Bee (ex-officio) Representative Jim Weiers (ex-officio)
Melanie M. Chesney, Director
Shan Hays, Manager and Contact Person
Elizabeth Shoemaker, Team Leader
Nanette Bailey
Jasmine Marin
DEBRA K. DAVENPORT, CPA
AUDITOR GENERAL
STATE OF ARIZONA
OFFICE OF THE
AUDITOR GENERAL
WILLIAM THOMSON
DEPUTY AUDITOR GENERAL
2910 NORTH 44th STREET • SUITE 410 • PHOENIX, ARIZONA 85018 • (602) 553-0333 • FAX (602) 553-0051
August 16, 2007
Members of the Arizona Legislature
The Honorable Janet Napolitano, Governor
Mr. Frank Davidson, Chair
Arizona School Facilities Board
Mr. John Arnold, Executive Director
Arizona School Facilities Board
Transmitted herewith is a report of the Auditor General, A Performance Audit and Sunset
Review of the Arizona School Facilities Board. This report is in response to a May 22,
2006, resolution of the Joint Legislative Audit Committee. The performance audit was
conducted as part of the sunset review process prescribed in Arizona Revised Statutes
§41-2951 et seq. I am also transmitting with this report a copy of the Report Highlights for
this audit to provide a quick summary for your convenience.
As outlined in its response, the Arizona School Facilities Board accepts or agrees with all
of the findings and plans to implement all of the recommendations directed at it.
My staff and I will be pleased to discuss or clarify items in the report.
This report will be released to the public on August 17, 2007.
Sincerely,
Debbie Davenport
Auditor General
Enclosure
The Office of the Auditor General has conducted a performance audit and sunset
review of the Arizona School Facilities Board (SFB), pursuant to a May 22, 2006,
resolution of the Joint Legislative Audit Committee. This audit was conducted as part
of the sunset review process prescribed in Arizona Revised Statutes (A.R.S.) §41-
2951 et seq.
The Legislature created the School Facilities Board in 1998 through legislation known
as Students FIRST (Fair and Immediate Resources for Students Today). Students
FIRST changed the way Arizona funds kindergarten- through 12th-grade (K-12)
schools by establishing minimum adequacy guidelines for facilities to meet and
providing state funding to ensure all school districts’ facilities comply with the
guidelines. Previously, Arizona’s school construction funding system relied on
property taxes and bonding. As a result, monies available for capital facilities
depended on a district’s property wealth, and the quality of facilities varied greatly
within the State, with some buildings being unsafe, unhealthy, and in violation of
building fire and safety codes. In 1994, the Arizona Supreme Court ruled on a 1991
lawsuit and declared that Arizona’s system of school capital finance did not conform
to the State’s Constitution, which requires the Legislature to enact laws to provide for
the establishment of a general and uniform public school system. Students FIRST
was enacted in response to the court ruling.
SFB is responsible for establishing minimum adequacy guidelines and managing
four funds to ensure that school facilities and equipment meet the guidelines.
Specifically:
􀁺􇩔 The Deficiencies Correction Fund provides funding to school districts to bring
their facilities up to the established minimum adequacy guidelines. Statute
required all deficiencies to be corrected by June 30, 2006. According to SFB’s
Executive Director, as of June 2007, only one district was still working to finish its
deficiency projects. As of April 10, 2007, SFB had expended approximately $1.3
billion from this Fund.
􀁺􇩔 The New School Facilities Fund provides kindergarten- through 12th-grade
school districts with monies to purchase land and build new school facilities to
accommodate student enrollment growth. As of June 7, 2007, SFB had
Office of the Auditor General
SUMMARY
page i
awarded 328 new school projects with a total value of approximately $2.78
billion, and as of May 31, 2007, it had distributed $1.9 billion in progress
payments to districts for their projects.
􀁺􇩔 The Building Renewal Fund provides school districts with monies to help them
maintain the adequacy of existing school facilities. In fiscal year 2006, SFB
distributed $71.3 million to districts from this Fund.
􀁺􇩔 The Emergency Deficiencies Correction Fund provides school districts with
monies to help them manage needs that threaten their functioning, preservation
or protection of property, or public health, welfare, or safety. From fiscal years
1999 through 2006, SFB awarded 14 emergency correction projects with a total
value of $8.4 million.
Future new school construction costs will place
increasing demands on General Fund (see pages 15
through 22)
Arizona’s choice to pay for new school construction from the General Fund makes it
particularly important for the Legislature to be aware of projected new school facilities
construction costs. The New School Facilities program provides K-12 school districts
with monies to purchase land and construct new school facilities to accommodate
student enrollment growth. Rising construction costs and rising student enrollment
are projected to create a need for new construction expenditures totaling $2 billion to
$2.4 billion between fiscal years 2008 and 2012. Under the current funding
mechanism, the total amount will have to come from the General Fund because other
sources of revenue used in previous years will be exhausted by fiscal year 2008.
Further, SFB’s interpretations of minimum adequacy guidelines will potentially
increase the impact on the General Fund under the current funding mechanism.
A.R.S. §15-2041 allows SFB to distribute money in excess of a statutory formula
amount to accommodate inflation, based on an index identified by the Joint
Legislative Budget Committee (JLBC), and other specified factors. SFB's additional
awards totaled $31.8 million in fiscal year 2007. Although SFB staff explained that the
awards are necessary to allow districts to build schools comparable to those built in
previous years, the additional awards are not based on an inflationary adjustment
allowed by statute and therefore may exceed SFB's statutory authority. To determine
if its actions are within the scope of its authority, SFB should seek a formal Attorney
General opinion and then follow the Attorney General's advice.
State of Arizona
page ii
Building renewal formula may need modification (see
pages 23 through 30)
The Legislature should consider modifying the school district building renewal
funding formula to help districts better manage their building renewal monies. The
Legislature has not used the formula to determine funding levels in recent years and
has several times passed bills with changes designed to make the formula more
workable. The Governor has vetoed these changes, citing concerns from a pending
lawsuit, which awaits a final court order. In June 2007, the Legislature established a
task force to review and make potential recommendations to change the building
renewal formula.
Formula-based amounts for fiscal years 1999 through 2007 would have totaled $1.2
billion, but actual appropriations totaled $606.8 million. Modifying and using the
formula would help make funding more predictable for school districts. In the past,
modifications studied and proposed included changing how older buildings and
portables are treated, changing how replacement value is determined, and revising
the assumptions for determining cost per square foot. Even without full formula
funding, some districts have accumulated large balances of renewal monies, but
district officials reported that the monies are needed for large future projects and to
compensate for funding fluctuations. Although most districts’ balances are $250,000
or less, six districts have accumulated balances between $3 million and $8 million.
The statutorily prescribed formula, based on a well-known formula created by two
facilities management experts, is used by other Arizona agencies, and the
Legislature has studied its use for those agencies. In 2000, a Joint Legislative Study
Committee examined the formula’s use for the Arizona Department of Administration,
the Board of Regents, and the Department of Transportation, and found that the
formula provides adequate support for state building renewal needs and should be
adequately funded to avoid long-term costs of deferred maintenance. However, the
study did not examine the formula’s use for school districts.
SFB should improve oversight of districts’ use of building
renewal monies (see pages 31 through 36)
SFB should improve its oversight and reporting of Building Renewal Fund
expenditures. As prescribed by statute, Building Renewal Fund monies are restricted
for specific purposes. To comply with reporting requirements, districts must submit
two building renewal reports to SFB every year: a plan and an expenditure report. The
plan includes a list of projects and their expected costs for each school in the district.
SFB staff review the plans to ensure the planned projects meet statutory
requirements and estimated costs appear reasonable. SFB staff did not start
Office of the Auditor General
page iii
reviewing the expenditure reports in depth until the Office of the Auditor General
began this audit. According to SFB management, there has always been some level
of review of building renewal expenditures, but they were not able to provide
evidence of their review or extent of it.
Both auditors and SFB staff identified instances of school districts inappropriately
using building renewal monies. Based on their descriptions in districts’ fiscal year
2005 expenditure reports, 193 expenditures totaling approximately $4 million of the
$40.6 million reported expenditures appeared to be potentially inappropriate uses for
building renewal monies. For example, the reports showed expenditures for new
construction, land improvements, and irrigation. Based on an in-depth review of 8 of
the 193 expenditures, auditors determined that 6 of the 8 expenditures did not meet
statutory criteria for approved uses of building renewal monies. Auditors also
identified inappropriate building renewal expenditures in a review of expenditures
reported in the Annual Financial Reports (AFR). Based on their descriptions in the
reports, approximately $8.8 million of the $44.2 million reported expenditures
appeared to be potentially inappropriate uses of building renewal monies. Based on
an in-depth review of expenditures submitted by three school districts, auditors
determined that some expenditures did not meet the statutory criteria for approved
uses of building renewal monies. Although many of these expenditures may be
appropriate, SFB staff can only speculate whether they are appropriate until they
analyze them.
Although SFB staff, during the audit, began evaluating expenditures for
appropriateness, they have not yet developed a standard process for this review. In
addition, SFB has never reported inappropriate expenditures to the Superintendent
of Public Instruction, as required by statute. Because the Superintendent would be
required to withhold other monies until the inappropriate expenditures were repaid,
the Executive Director does not believe it would be fair to report them without a
process for the districts to challenge SFB staff’s findings. SFB should develop and
implement policies and procedures for its staff to review expenditure reports, allow
districts to challenge its findings, and report inappropriate expenditures to the
Superintendent of Public Instruction.
Controls should be improved to ensure monies paid out
appropriately (see pages 37 through 41)
Although SFB has some good practices to help ensure that it appropriately manages
payments for school districts’ projects, it lacks a complete system of internal controls.
SFB, one of the State’s highest recipients of legislatively appropriated monies, pays
out hundreds of millions of dollars each year for districts’ projects. SFB has
developed some good practices, such as requiring supporting documentation from
State of Arizona
page iv
districts to support the amounts requested and separating duties so that different
employees prepare, enter, and approve payments on the State’s accounting system.
According to SFB’s executive director, SFB staff reconciled payments data in the
SFB’s project-tracking database to the payments recorded in the state-wide
accounting system. However, until December 2004, SFB did not retain evidence of
these reconciliations. Further, SFB lacks written policies and procedures to help
ensure its practices are followed consistently, and does not always use its close-out
procedure, which is one of its best controls, for all projects. As a result, it has made
some overpayments. Specifically, 31 out of 530 projects for the period June 1999
through November 2006 had negative balances totaling $1.7 million, indicating that
expenditures may have exceeded awards. In a review of 11 of these projects that had
negative balances totaling approximately $1.5 million, auditors found most negative
balances resulted, in part, from recordkeeping errors, but SFB had made
overpayments totaling $63,200 for 4 projects. SFB should take steps to improve its
internal control policies and procedures to help ensure payments are appropriate.
Database controls need improvement (see pages 43
through 50)
In addition to improving its overall internal control framework, SFB needs to improve
controls over its project-tracking database. SFB relies on the database to help
manage its payments and track project information. As a result, controls are
important to ensure the data is secure and reliable. However, SFB lacks some
important controls, such as unique passwords for different users, and automated
edit checks to ensure payments do not exceed approved amounts. A comparison of
SFB practices to the internationally recognized COBIT® guidelines for information
systems found that SFB only partially addresses the guidelines.
These weaknesses appear related to SFB’s lack of adequate oversight of IT
resources and to a contract that delegates too much authority to SFB’s IT consultant.
SFB needs to take several steps to improve its IT controls to help ensure schools are
paid appropriately and to improve the data it uses for budgeting purposes.
Specifically, SFB should improve security measures, establish written policies and
procedures, and develop a formal training program. SFB should also develop and
test its business continuity plan. In addition, it should modify its consultant contract
to specify documentation and security requirements and to establish state ownership
of the project-tracking database. Finally, it should consider the best method to meet
its IT needs through the use of consultants or in-house resources.
Office of the Auditor General
page v
Other Pertinent Information (see pages 51 through 53)
As part of the audit, auditors gathered other pertinent information regarding the
Board’s awards of monies for school districts’ emergency deficiency correction
projects. The Legislature established the Emergency Deficiencies Correction Fund to
help districts manage serious needs in excess of their current budgets. SFB has
awarded 14 projects totaling approximately $8.4 million to districts since its inception
in fiscal year 1999.
State of Arizona
page vi
Office of the Auditor General
TABLE OF CONTENTS
page vii
Introduction & Background 1
Finding 1: Future new school construction costs will place
increasing demands on General Fund 15
Program provides General Fund monies to build new schools 15
General Fund demands expected to increase 16
Recent SFB interpretations may result in greater General Fund impact 20
Recommendations 22
Finding 2: Building renewal formula may need modification 23
Statute contains funding formula 23
Legislature has used various mechanisms to determine funding 24
Attempts to change formula were vetoed; litigation prompting vetoes awaits
final court order 25
Revising formula could make funding more predictable for districts 26
Previously proposed changes addressed various aspects of formula 29
Recommendation 30
Finding 3: SFB staff should improve oversight of districts’ use
of building renewal monies 31
Building renewal monies restricted to specific purposes 31
SFB staff provide limited oversight 32
SFB staff should strengthen oversight 33
Recommendations 36
continued
State of Arizona
TABLE OF CONTENTS
continued
page viii
Finding 4: Controls should be improved to ensure
monies paid out appropriately 37
SFB manages and pays out hundreds of millions of dollars
annually for school projects 37
SFB risks overpaying because essential internal controls are not
applied 38
Recommendations 41
Finding 5: Database controls need improvement 43
Database controls important to managing payments 43
SFB lacks some needed controls 44
SFB should improve IT controls 47
Recommendations 49
Other Pertinent Information 51
Sunset Factors 55
Appendix A a-i
Agency Response
Auditor General Reply to Agency Response
Office of the Auditor General
TABLE OF CONTENTS
concluded
page ix
Tables:
1 Debt Service Requirements for Bonds
As of June 30, 2006
(In Thousands) 6
2 Schedule of Revenues, Expenditures, and Changes in Fund Balance
Fiscal Years 2005 through 2007
(Unaudited) 7
3 SFB New Interpretations to Minimum Adequacy
Guidelines 21
4 Comparison of Number of Districts and
Unexpended End of Year Building Renewal Fund Balances
Fiscal Years 2005 and 2006
(Unaudited) 27
5 Analysis of SFB’s IT Control Framework 45
6 Schedule of Emergency Project Awards
Fiscal Years 1999 through 2006
(Unaudited) 52
Figures:
1 Expenditures of Deficiencies Correction Fund Monies
As of April 10, 2007
(In Millions) 3
2 General Fund Appropriations by Program
Fiscal Years 1999 through 2007
(In Millions) 5
3 Actual and Projected Student Growth
Fiscal Years 1999 through 2026 17
4 Comparison of JLBC- and SFB-Projected Costs for New School
Construction
Fiscal Years 2008 through 2012 19
5 Comparison of Formula-Based and Actual Appropriations
of Building Renewal Monies
Fiscal Years 1999 through 2007
(Unaudited) 25
State of Arizona
page x
The Office of the Auditor General has conducted a performance audit and sunset
review of the Arizona School Facilities Board (SFB) pursuant to a May 22, 2006,
resolution of the Joint Legislative Audit Committee. This audit was conducted as part
of the sunset review process prescribed in Arizona Revised Statutes (A.R.S.) §41-
2951 et seq.
SFB history and responsibilities
The School Facilities Board (SFB) was created in 1998 by legislation known as the
Students FIRST Act (Fair and Immediate Resources for Students Today). Students
FIRST changed the way Arizona funds kindergarten- to 12th-grade (K-12) schools
by establishing minimum adequacy guidelines for facilities to meet and providing
state funding to ensure all school districts’ facilities comply with the guidelines. The
legislation resulted from a 1991 lawsuit filed by four school districts that alleged
Arizona’s school construction funding system was unconstitutional. The previous
system relied on property taxes and bonding, and as a result, monies available for
capital facilities depended on a district’s property wealth. Thus, the quality of
facilities varied greatly within the State with some buildings being unsafe,
unhealthy, and in violation of building fire and safety codes. In 1994, the Arizona
Supreme Court declared that Arizona’s system of school capital finance did not
conform to the State Constitution’s Article 11, Section 1.A., which requires the
Legislature to enact laws to provide for the establishment of a general and uniform
public school system.
Students FIRST created SFB to ensure that school buildings and equipment meet
appropriate guidelines for Arizona students to achieve academic success. To
accomplish this goal, SFB was charged with establishing guidelines for school
facilities and administering a deficiency correction program to bring inadequate
facilities up to the guidelines by June 2003.1 In addition, SFB is responsible for
administering state monies for new school facilities construction and building
renewal, and meeting facilities’ emergency needs.
Office of the Auditor General
INTRODUCTION
& BACKGROUND
page 1
Students FIRST created
SFB to ensure that
school buildings and
equipment meet
appropriate guidelines
for Arizona students to
achieve academic
success.
1 Laws 2005, 7th S.S., Ch. 287, §7, changed the deadline for completing deficiencies correction projects to June 30, 2006.
Minimum adequacy guidelines
SFB’s responsibilities include creating minimum adequacy guidelines that school
facilities and equipment should meet. Although Students FIRST created some
guidelines, such as that buildings must be structurally sound, it charged SFB with
establishing minimum adequacy guidelines for Arizona’s school
facilities. SFB adopted minimum school facility guidelines in its
administrative rules on September 2, 1999. These guidelines
include all nine elements that A.R.S. §15-2011 requires SFB to
address (see textbox). Since the adoption of these guidelines, SFB
has amended them twice. First, in March 2001, SFB developed
minimum guidelines for energy efficiency and amended the
technology guidelines. Second, in June 2001, SFB adopted
guidelines for library and media center equipment, classroom
temperature, outdoor play surfaces, and transportation capacity. In
November 2001, the Legislature amended SFB’s statutes and
removed its ability to make further amendments to the minimum
adequacy guidelines during fiscal years 2003 and 2004, unless the
changes were necessary to comply with building health, fire, or
safety codes or would reduce state costs. As of 2007, SFB has the
ability to make changes to the minimum adequacy guidelines in its
rules but has not recently done so.
SFB-administered funds
Statute requires SFB to manage four funds to address districts’ capital needs,
including needs for new construction as well as maintenance and repair of existing
facilities. Specifically:
􀁺􇩔 The Deficiencies Correction Fund provides funding to school districts to bring
their facilities up to the established minimum adequacy guidelines.
Administration of this Fund was one of SFB’s primary duties until June 30,
2006, the statutory deadline for completing correction of all deficiencies.
According to SFB’s Executive Director, as of June 2007, only one district was
still working to finish its deficiency projects.
Deficiency projects include both square footage deficiencies and quality
deficiencies. Square footage deficiencies exist when a school district does not
have the required number of square feet per student according to the formula
established in statute. A quality deficiency exists when a district facility does
not comply with the minimum adequacy guidelines. Quality deficiencies
include deficiencies in areas such as lighting, air quality, food services, and
State of Arizona
page 2
Minimum adequacy guidelines must
address:
􀁺􇩓 School sites
􀁺􇩃 Classrooms
􀁺􇩌 Libraries
􀁺􇩃 Cafeterias
􀁺􇩁 Auditoriums and multipurpose rooms
􀁺􇩔 Technology
􀁺􇩔 Transportation
􀁺􇩆 Facilities for science, arts, and physical
education
􀁺􇩏 Other facilities and equipment necessary to
achieve academic standards
Source: A.R.S. §15-2011.
Statute requires SFB to
manage four funds to
address districts’
capital needs,
including the needs for
new construction as
well as maintenance
and repair of existing
facilities.
technology. To identify deficiencies requiring correction, SFB staff, with the
assistance of a contractor, assessed all school facilities in the State against
the minimum adequacy guidelines. Each district received a copy of its
assessment, and SFB ensured that the district agreed with the identified
deficiencies by reviewing them with district officials. The assessment was a
one-time process, and school districts will not receive additional funds after
their identified projects are complete.
As illustrated by Figure 1, as of
April 10, 2007, SFB had
expended approximately $1.3
billion to pay for identified
deficiency projects, technology,
equipment, and project
oversight. This money was used
for a total of 9,002 projects. SFB
distributed $19.9 million from the
Deficiencies Correction Fund for
district projects in fiscal year
2006. As of June 30, 2006, the
Fund’s fund balance totaled
approximately $30.3 million.
Proceeds from the sale of bonds
were the main source of monies
for this program. (See page 6 for
more information.)
􀁺􇩔 The New School Facilities Fund
provides K-12 school districts
with monies to purchase land
and build new school facilities to
accommodate student enrollment growth. School construction includes both
building a new facility and adding space to an existing one. As prescribed by
A.R.S. §15-2041, a district is eligible for funding if SFB-approved projections
indicate that additional space will be needed within the next 2 years for an
elementary school or within 3 years for a middle or a high school. SFB
determines eligibility for funding by considering district enrollment projections,
existing square footage of schools in the district, and the additional square
feet that will be needed to maintain the minimum square feet per student.
SFB staff calculate the amount of funding a district receives according to a
formula prescribed in A.R.S. §15-2041. Specifically, to determine funding for a
construction project, SFB staff multiply the number of new students who will
be served times the required minimum square feet per student and a funding
amount per square foot. The statute establishes the square feet per student
for new construction based on grade level, ranging from 90 to 134 square feet.
Office of the Auditor General
page 3
The New School Facilities
Fund provides
kindergarten to 12th-grade
school districts
monies to purchase land
and build new school
facilities.
Figure 1: Expenditures of Deficiencies Correction Fund Monies
As of April 10, 2007
(In Millions)
Oversight
$54.3
Technology
$166.9
Project
expenditures
$1,040.0
Source: Auditor General staff analysis of SFB’s deficiency report, as of April 10,
2007.
Equipment
$50.8
Total Expenditures = $1.3 billion
It also establishes the funding per square foot, adjusted annually
based on construction market conditions, with an additional 5
percent adjustment for school projects in rural areas (see
textbox). Districts can apply for additional monies if they cannot
build a school that meets minimum adequacy guidelines with the
amount calculated by the formula.
As of June 7, 2007, SFB had awarded 330 new school projects
with a total value of approximately $2.78 billion (see textbox). As
of June 30, 2007, SFB had distributed $1.96 billion in progress
payments to districts for their projects (See Finding 1, pages 15
through 22, for more information on this program). Proceeds from
the use of lease-to-own agreements and General Fund
appropriations are the main sources of monies for this program
(See page 6 for more information on lease-to-own agreements
and General Fund appropriations.)
􀁺􇩔 The Building Renewal Fund provides school districts with monies to
help them maintain the adequacy of existing school facilities. While
the deficiencies program helped bring school facilities up to the
established minimum adequacy guidelines, this program helps
districts maintain and extend the life of their school facilities. A.R.S.
§15-2031 authorizes the use of this Fund primarily for buildings
owned by the districts that are required to meet academic standards
and secondarily for any other buildings owned by the districts.
Examples of allowed expenditures include replacing air conditioning
units and carpet and repairing roofs. SFB staff determine annual
distributions based on a statutorily established formula that
considers square footage, age, and student capacity of each
district’s buildings.
SFB distributed $71.3 million from the Building Renewal Fund in fiscal
year 2006, and SFB staff project that it will distribute $94 million in fiscal
year 2007. Nearly all—187 out of 215—school districts received building
renewal monies in fiscal year 2006, with the amounts per district ranging
from $144 to $7.6 million.1 The remaining 28 districts did not receive building
renewal monies because they did not comply with statutory reporting
requirements or because their buildings were too new to receive the monies.
(See Finding 3, pages 31 through 36, for more information on this program.)
General Fund appropriations are the source of funding for this program. (See
revenue sources section on page 5 for more information on General Fund
appropriations.)
State of Arizona
page 4
New construction awards
(As of June 7, 2007)
231 elementary schools
42 middle schools
53 high schools
4 other projects
Total $2.78 billion
Distributions
(Fiscal years 1999 through 2007)
$1.96 billion
Fiscal year 2006: $338.7 million
Fiscal year 2007 estimate: $350.6 million
Source: Auditor General staff analysis of School Facilities Board
Annual Report Fiscal Year 2005-2006, Arizona
Financial Information System (AFIS) Event Transaction
file, JLBC staff analysis of fiscal years 1999 through
2006 SFB appropriations and expenditures, and
information provided by SFB management.
The Building Renewal
Fund provides
districts with monies
to help them maintain
the adequacy of
existing school
facilities.
Statutorily prescribed square footage
and funding amount per square foot as
of October 24, 20061:
Grade Level Square Footage Amount
Kindergarten to 6th 90 $131.13
7th and 8th 100 $138.42
9th to 12th 125 or 134 $160.28
Rural schools Add 5%
1 Amounts are adjusted annually.
Source: A.R.S. §15-2041 and JLBC minutes for October 24, 2006.
1 For fiscal year 2006, Arizona had a total of 239 school districts. However, according to SFB staff, only the 215 districts
listed on SFB’s annual building renewal report had buildings that would qualify to receive building renewal monies.
􀁺􇩔 The Emergency Deficiencies Correction Fund provides school districts with
monies to help them manage needs that threaten their functioning,
preservation or protection of property, or public health, welfare, or safety.
When a school district has an emergency for which it does not have adequate
monies, the district may apply to SFB for monies. The district must disclose
any insurance or building renewal monies that would be available to pay for
the emergency.
From fiscal years 1999 through 2006, SFB awarded 14 emergency correction
projects with a total value of $8.4 million. Projects paid for with emergency
monies included installing a water treatment system to lower arsenic levels in
an existing well and repairing roof damage caused by heavy rains. Transfers
from the Deficiency Correction and New Construction Funds provide the
monies for this program because the Emergency Deficiencies Correction
Fund does not have a dedicated revenue source. According to SFB, its ability
to assist districts with future emergency projects may be limited because the
Deficiencies Correction Fund was repealed on June 30, 2006. (See Other
Pertinent Information, pages 51 through 53, for more information on this
program.)
Revenue sources
Several sources of revenue fund SFB’s
programs, including General Fund monies,
bond revenues, and lease-to-own
agreements. Specifically:
General Fund monies—For fiscal years 1999
through 2007, SFB received a total of
more than $2.2 billion in General Fund
monies, including transfers of sales
taxes, to support its programs and
operations.1 As illustrated by Figure 2,
more than half of the monies were
appropriated to support the New
Construction program, while most of the
remaining monies were appropriated for
school construction lease payments
and for building renewal projects.
Office of the Auditor General
page 5
1 The General Fund appropriations amount includes direct transfers of transaction privilege tax (sales tax) revenues by the
State Treasurer rather than through appropriations.
Source: Auditor General staff analysis of JLBC’s K-12 Funding Since 1997
report dated March 14, 2007, and JLBC appropriations reports for
fiscal years 1999 through 2007.
Figure 2: General Fund Appropriations by Program
Fiscal Years 1999 through 2007
(In Millions)
Kindergarten
projects
$8.0
School
construction lease
payments
$189.5
Building renewal
$606.8
Deficiencies
corrections
$176.0 New school
construction
$1,247.8
Operations
$14.2
Bond revenues—In fiscal years 1999 through 2006, SFB
received a total of approximately $1.1 billion in bond
proceeds to pay for the cost of correcting deficiencies.1 As
shown in Table 1, after principal payments through fiscal
year 2006, the remaining balance is approximately $877
million, and SFB is expected to pay approximately $91.3
million per year for fiscal years 2007 through 2011 in
principal and interest on these bonds. In order to provide
immediate funding to correct existing school facilities’
deficiencies, SFB first issued bonds in June 2001. However,
because the deficiency program has ended, SFB has not
issued any new bonds since August 2005.
Lease-to-own agreements—In fiscal years 1999 through
2006, SFB received a total of $900 million in lease-to-own
monies to pay for new school construction. These
agreements are also called certificates of participation
(COPS).2 During fiscal years 2003 through 2005, the
Legislature authorized SFB to enter into lease-to-own transactions
valued at $400 million, $250 million, and $250 million, respectively.
These arrangements are scheduled to end in 2020. Laws 2006, Chapter
353 eliminated SFB’s ability to enter into lease-to-own transactions
because the Legislature intended to fund new school construction on a
cash basis.
Budget
As indicated by Table 2 (see page 7), the largest sources of SFB revenues are
appropriations from the General Fund, including transfers of transaction
privilege taxes (sales taxes) authorized by voters through Proposition 301,
passed in November 2000. From fiscal years 1999 through 2006, monies
appropriated for SFB consisted of transaction privilege taxes.3 Starting in fiscal
year 2007, SFB’s appropriations for all programs are strictly from the General
Fund, except for sales taxes used to make bond debt service payments. In
addition to its appropriations, SFB receives revenues from other sources,
including remaining proceeds from lease-to-own agreements and the sale of
land.
State of Arizona
page 6
-t -o An
agreement in which SFB
is responsible for long-term
rental and lease
payments of a school
facility, and has the
option of purchasing the
facility and transferring
ownership to a school
district. These
agreements are
sometimes called
certificates of
participation (COPS).
Table 1: Debt Service Requirements for Bonds
As of June 30, 2006
(In Thousands)
Fiscal Year Principal Interest Total
2007 $ 47,844 $ 43,417 $ 91,261
2008 49,818 41,463 91,281
2009 52,064 39,213 91,277
2010 54,478 36,799 91,277
2011 57,289 33,987 91,276
2012-2016 334,467 121,424 455,891
2017-2021 280,697 31,014 311,711
Total $876,657 $347,317 $1,223,974
Source: Office of the Auditor General’s compliance attestation report
highlights for SFB's deficiency correcti ons debt financing for
fiscal year 2006.
1 SFB issued a total of $1.8 billion in bonds. However, according to SFB management, some of the bonds issued
were to retire older bonds, and SFB received only $1.1 billion.
2 Lease-to-own proceeds represent total net proceeds, including principal, premiums, and expenses related to their
insurance.
3 Sales tax revenues are received as a result of the passage of Proposition 301 in November 2000, which increased
the State's sales tax from 5 percent to 5.6 percent and dedicated a portion of the increase to pay the principal and
interest on SFB's bonds. Until fiscal year 2005, A.R.S. §42-5030.01 required the Treasurer to transfer amounts
directly to SFB, based on instructions from SFB, for new construction, building renewal, deficiency correction, and
bonded debt service payments. Laws 2005, Ch. 287, §12 amended the statute to eliminate this provision and
established that beginning in fiscal year 2007, SFB will only receive sales taxes for the payment of bonded debt
service payments.
Office of the Auditor General
page 7
Table 2: Schedule of Revenues, Expenditures, and Changes in Fund Balance
Fiscal Years 2005 through 2007
(Unaudited)
2005 2006 2007
(Actual) (Actual) (Estimate)
Revenues:
State General Fund appropriations and transaction privilege taxes1 $390,767,475 $518,285,272 $477,615,900
Rental income2 22,263,480 17,562,604 18,376,900
Interest on investments3 14,917,693 14,997,232 14,264,700
Loan and interest income2 6,967,976 4,903,390 4,767,000
Other 69 65,490
Total revenues 434,916,693 555,813,988 515,024,500
Expenditures:
Operating:
Personal services and employee-related 1,673,842 1,244,673 1,322,800 4
Professional and outside services 858,392 532,896 233,300 4
Travel, other operating, and equipment 223,093 235,826 199,1004
Total operating expenditures 2,755,327 2,013,395 1,755,200
Aid to school districts:
Payments to school districts 378,503,994 410,081,410 441,597,800 5
Payments made on behalf of school districts 81,989,815 16,189,354 1,364,500 5
Recoveries and repayments from school districts6 (15,259,497) (1,523,638) (4,000,000)
Total aid to school districts 445,234,312 424,747,126 438,962,300
Principal and interest payments 104,605,280 140,854,609 166,993,800
Total expenditures 552,594,919 567,615,130 607,711,300
Deficiency of revenues over expenditures (117,678,226) (11,801,142) (92,686,800)
Other financing sources (uses):
Certificates of Participation issued 261,249,496 61,867,527 17,200,000
Bonds issued 36,948,851 107,045
Proceeds from sale of land 2,793,760
Reversions to the State General Fund7 (106,887,903) (60,080,500)
Operating transfers out8 (3,215,000) (1,865,400)
Total other financing sources (uses) 188,095,444 64,768,332 (44,745,900)
Excess (deficiency) of revenues and other financing sources over
expenditures and other financing uses 70,417,218 52,967,190 (137,432,700)
Fund balance, beginning of year 42,090,351 112,507,569 165,474,759
Fund balance, end of year $112,507,569 $165,474,759 $ 28,042,059
1 Amount includes direct transfers of transaction privilege tax (sales tax) revenues by the State Treasurer. A portion of sales tax revenues is
received as a result of the passage of Proposition 301 in November 2000, which increased the State’s sales tax from 5 percent to 5.6 percent
and dedicated a portion of the increase to pay the principal and interest on SFB’s bonds.
2 Amounts consist of monies provided by the State Land Department in accordance with A.R.S. §37-521(B), which requires using the monies to
pay the year’s debt service on bonds before using them for other purposes. Approximately $16.4, $8.9, and $10 million was available for other
uses in 2005, 2006, and 2007, respectively.
3 Amounts were used to pay debt service (principal and interest) on bonds.
4 Administrative adjustments are included in the fiscal year paid.
5 The 2007 payments to school districts includes the estimated on-behalf payments for the period March 1 to June 30, 2007, because SFB does
not budget these amounts separately and could not readily estimate the remaining fiscal year 2007 amounts. The on-behalf payments for
2007 only include the actual amounts paid on behalf of school districts through February 28, 2007.
6 According to SFB management this consists of school districts payments on certain projects and unused monies returned by the school districts.
7 Amount consists primarily of monies that were returned to the State General Fund as directed by Laws 2004, Chapter 274 and Laws 2005,
Chapter 287.
8 Operating transfers out were transferred or expected to be transferred to the Department of Education to provide Hayden-Winkelman Unified
School District with supplemental state aid in accordance with Laws 2004, Chapter 278 and Laws 2006, Chapter 353.
Source: Auditor General staff analysis of the Arizona Financial Information System (AFIS) Accounting Event Transaction File; AFIS Revenue
and Expenditures by Fund, Program, Organization, and Object and Trial Balance by Fund reports for fiscal years 2005 and 2006; and
SFB-prepared estimates for fiscal year 2007.
State of Arizona
page 8
Organization and staffing
SFB is overseen by a ten-member governing board. The Governor appoints nine
voting members based on statutory criteria, and the Superintendent of Public
Instruction or designee serves as an advisory nonvoting member.
During fiscal year 2006, SFB had 15 staff, including an
executive director, deputy director of facilities, deputy director
of finance, an architect, a demographer, 4 school facilities
liaisons, and other administrative staff. SFB has 3 vacant
positions; however, according to its Deputy Director of
Finance, it has only enough monies to employ 15 staff.
Additionally, it uses contractors to provide other expertise,
including information technology and land consultation. SFB
has requested additional funding for fiscal year 2008 to
contract for additional information technology services,
including programming and management of its network and
computers, and to help ensure its operations meet state IT
security standards. (For information related to SFB’s data
security see Finding 5, pages 43 to 50.)
Scope and methodology
This audit focused on the rising cost of construction and its impact on the General
Fund, SFB’s process for distributing and overseeing building renewal funds, and
how SFB manages its funds. This audit includes five findings and associated
recommendations, as follows:
􀁺􇩒 Rising construction costs and enrollment growth will place increasing
demands on the General Fund, which is the sole source for new school
construction monies under the current funding mechanism. SFB should seek
a formal Attorney General opinion to clarify its authority to make additional
awards beyond the statutory formula amount.
􀁺􇩔 To help districts better manage their building renewal monies, the Legislature
should consider modifying the formula. The Legislature has not used the
formula in recent years and in June 2007 formed a task force to review the
formula and make potential recommendations to change it.
􀁺􇩓 SFB should improve its oversight and reporting of Building Renewal Fund
expenditures to ensure the monies are used as prescribed by statute.
9 voting members are:
􀁺􇩁 An elected member of a school district
governing board
􀁺􇩁 A taxpayer organization’s representative
􀁺􇩁 An individual with knowledge and experience in
school construction
􀁺􇩁 A registered architect
􀁺􇩁 An individual with knowledge and experience in
school facilities management in a public school
system
􀁺􇩁 An individual with knowledge and experience in
demographics
􀁺􇩁 A teacher
􀁺􇩁 A registered professional engineer
􀁺􇩁 An owner or officer of a private business
Source: A.R.S. §15-2001 (A).
SFB is overseen by a
ten-member governing
board including the
Superintendent of
Public Instruction, who
does not vote.
􀁺􇩓 SFB should improve its internal control framework to better ensure that it
appropriately manages and pays out hundreds of millions of dollars annually
for school projects including new school construction, deficiencies, and
emergencies.
􀁺􇩓 SFB should improve controls over its project-tracking database, which it relies
on to manage payments to school districts and vendors.
In addition, this report contains other pertinent information regarding how SFB has
used Emergency Deficiencies Correction Fund monies (see pages 51 through 53).
Also, this report contains answers to seven legislative questions regarding the
design of school facilities and the accuracy of SFB’s financial information (see
Appendix A, pages a-i through a-v) and responses to the statutory sunset factors
(see pages 55 through 62).
Auditors used a variety of methods to study the issues addressed in this audit
report, including interviewing SFB staff, Joint Legislative Budget Committee staff,
and Office of Strategic Planning and Budgeting staff; and reviewing SFB’s budget,
strategic plans, statutes, administrative rules, policies and procedures, and Board
meeting minutes. Auditors also used the following specific methods:
􀁺􇩅 Evaluating increasing costs to build new school facilities and their impact
on the General Fund—To assess the future impact of new school facilities
construction costs upon the General Fund, auditors reviewed both past
and projected student enrollment growth and both past and projected
construction costs. Past enrollment figures were obtained from annual
enrollment numbers reported by the Arizona Department of Education
that are collected from school districts and then reported in aggregate
numbers on the Arizona Department of Education’s Web site. To
determine projected student enrollment, auditors reviewed data collected
and analyzed by SFB staff, who based their projections upon data
received from the Arizona Department of Economic Security and the
University of Arizona. To assess the impacts of past inflation on new
school construction costs, auditors reviewed a report on a national survey
of public owners regarding construction costs conducted by
PinnacleOne and assessed an inflation index produced by Rider, Hunt,
Levett, and Bailey.1 To determine current construction costs, auditors
reviewed new school construction awards and the costs associated with
those awards for calendar years 2005 and 2006. To determine the
expected cost to the General Fund because of enrollment growth and
construction cost increases, auditors examined projected costs reported
by SFB staff and Joint Legislative Budget Committee (JLBC) staff. In
addition, auditors conducted interviews with ten school district officials
who were questioned regarding program performance, eight school
district officials who were asked questions related to funding issues,
Office of the Auditor General
page 9
1 PinnacleOne is a national construction consulting firm that has worked with some Arizona school districts on new school
construction projects. Rider, Hunt, Levett, and Bailey is a world-wide construction consulting firm.
industry professionals such as a construction management firm project
manager and SFB’s staff architect, and school or finance officials in
seven other states.1 Auditors also reviewed a report on Arizona new
school construction prepared by a professional association.
􀁺􇩁 Assessing the need to study the Building Renewal funding formula—To
determine how the Legislature has funded this program, auditors
reviewed appropriations reports for fiscal years 2000 through 2007 and
interviewed staff with the JLBC and the Governor’s Office for Strategic
Planning and Budgeting (OSPB). To study the statutorily prescribed
funding formula, auditors reviewed a report by the Joint Legislative Study
Committee on the State Building Renewal Formula and Process and an
article on the creation of the building renewal formula from the Council of
Educational Facility Planners Journal.2,3 In addition, auditors interviewed
one of the formula’s creators, William Dergis, a facilities management
expert who co-developed the formula when he worked at the University
of Michigan. To understand previously proposed changes to the funding
formula, auditors reviewed the JLBC proposal for fiscal year 2004 and
discussed the ideas in it with William Dergis. To determine the reasons
districts have building renewal balances at the end of the fiscal year and
to understand how building renewal funding levels affect school districts,
auditors judgmentally selected four districts that had large building
renewal ending balances ranging from $2.2 million to $7.6 million as of
June 30, 2005. Auditors interviewed district officials in these four districts
regarding the balances and reviewed supporting documents supplied by
the officials, including internal capital plans and bond statements. In
addition, auditors interviewed officials from three districts whose
expenditures were selected as part of the review of expenditures that
appeared to be inappropriate as described below, and reviewed
supporting documents provided by those officials.
􀁺􇩁 Assessing SFB’s oversight and reporting of building renewal
expenditures—To determine the appropriateness of school districts’
building renewal expenditures, auditors analyzed two judgmental
samples of expenditures for fiscal year 2005. These expenditures were
obtained from two sources: SFB’s project-tracking database and the
Annual Financial Reports that districts submit to the Arizona Department
of Education. Specifically:
To select school districts’ building renewal expenditures for further review
from the SFB’s project-tracking database, auditors used Statistical
State of Arizona
page 10
1 Auditors interviewed school finance officials in California, Hawaii, Nevada, New Mexico, Ohio, Texas, and Vermont. These
states were selected based on their region of the country or their method of paying for school construction.
2 Laws 2000, Chapter 228, established the Joint Legislative Study Committee on the State Building Renewal Formula and
Process effective until December 31, 2000.
3 Sherman, Douglas R., and William A. Dergis. A Funding Model for Building Renewal. CEFP Journal, Volume 9, Issue No.
3 (Jan.-Feb.1984):
Package for the Social Sciences (SPSS) Text Analysis Software to classify
all 2,945 expenditures reported to SFB, and identified 193 expenditures
that appeared potentially inappropriate based on their descriptions in
comparison to statutes, SFB policies, and uniform standards for financial
reporting. Auditors interviewed SFB’s Director of Facilities regarding the
193 expenditures to obtain an understanding of the circumstances that
might make these expenditures appropriate. A judgmental sample of 8 of
these expenditures was selected for further analysis, based on the size of
the expenditures and to represent a variety of expenditure types and
school district geographic locations, including both rural and urban
districts.
To identify school district building renewal expenditures for further review
from the Annual Financial Reports (AFR), auditors first reviewed the AFR
account code descriptions in conjunction with statutes, SFB policies, and
uniform standards for financial reporting. Out of 11,287 expenditures
districts reported in their AFR, auditors identified 510 that appeared
potentially inappropriate based on the account code they were charged
to. Auditors interviewed the SFB’s Director of Facilities to obtain an
understanding of the circumstances that might make these expenditures
appropriate. A judgmental sample of 60 expenditures was selected for
further analysis based on the size of the expenditures and to represent a
variety of expenditure types and geographic locations, including both
rural and urban districts.
For both samples, to assess whether expenditures were in compliance
with statute, auditors reviewed invoices, purchase orders, and other
supporting documents provided by the districts. Auditors also
interviewed district officials to obtain their explanations for how the
monies were used. Auditors used this information to determine whether
the expenditures were in compliance with statute. Additionally, the Office
of the Auditor General’s General Counsel reviewed the expenditures to
determine if they were in compliance with statute based on districts’
documentations and explanations. Auditors shared the results of the
samples of expenditures with the SFB’s Executive Director and requested
his opinion on the expenditures.
􀁺􇩁 Assessing SFB’s internal controls over project payments—To assess
SFB’s internal controls over its payments for school districts’ projects,
auditors reviewed expenditures recorded on the Arizona Financial
Information System (AFIS) for fiscal years 2005 and 2006. These
expenditures included payments made to county treasurers, who are
responsible for distributing the monies to the school districts in their
counties, and payments made directly to vendors to pay for school
districts’ projects. Auditors compared AFIS and SFB’s project-tracking
Office of the Auditor General
page 11
1 IT Governance Institute. COBIT® 4.0: Control Objectives, Management Guidelines, Maturity Models. Rolling Meadows,
IL.: IT Governance Institute, 2005.
database records for fiscal year 2006 payments to county treasurers for
school districts’ new construction, emergency corrections, and
deficiencies corrections projects, and investigated significant differences.
In addition, auditors observed SFB staff performing certain payment
duties. To determine whether SFB had made overpayments, auditors
selected a judgmental sample of 11 out of 31 new construction projects
that were active during June 10, 1999 through September 27, 2006, and
had negative balances in SFB’s project-tracking database, suggesting
that project expenditures were higher than SFB awards, and a
judgmental sample of 10 new construction and kindergarten projects that
were active during June 10, 1999 through September 27, 2006, and had
low balances in the database, including 5 projects with zero balances
and 5 projects with balances between $1 and $10,000. For both samples,
auditors compared the database information with SFB-approved
budgets and supporting documentation.
􀁺􇩁 Assessing SFB’s internal controls over its systems—To obtain an
understanding of SFB’s data system controls, auditors reviewed SFB’s
October 2005 Business Continuity Plan, observed SFB staff using the
project-tracking database, and interviewed SFB’s IT consultant and SFB
officials. To determine whether SFB’s project-tracking database
contained errors, auditors relied on their work conducted to assess
internal controls over payments. To assess internal controls over the
project-tracking database, auditors compared SFB’s information
technology (IT) framework to guidelines published in the IT Governance
Institute’s Control Objectives for Information and Related Technology;
evaluated compliance with selected Government Information Technology
Agency (GITA) policies; reviewed SFB’s list of prioritized future IT
projects; reviewed SFB staff’s desk procedures; and reviewed the
project-tracking database input screen and data structure.1
􀁺􇩏 Other Pertinent Information—To gather information regarding SFB’s
awards of emergency funds, auditors reviewed board meeting minutes
and packets from 1999 through 2006, an Emergency Fund Balance
report dated October 10, 2006, and emergency deficiencies program
policies and procedures.
􀁺􇩁 Appendix A—To answer legislative questions about districts’ school
designs, auditors sent an e-mail survey to all school districts in Arizona.
The survey asked districts to answer the questions if they had built a new
school between fiscal years 2004 and 2006. Forty-three districts
responded to the survey. To answer the legislative question about the
accuracy of SFB’s financial information, auditors relied on information
obtained in reviewing internal controls and preparing revenue and
expenditure information for the Introduction and Background.
State of Arizona
page 12
Office of the Auditor General
page 13
􀁺􇩉 Introduction and Background—To gather information for the Introduction
and Background, auditors reviewed Arizona’s constitution, statutes,
session laws, rules, legislative committee hearings, SFB’s fiscal year
2008 budget request, and the Arizona Financial Information System
(AFIS) Accounting Event Transaction File and Revenue, Expenditures by
Fund, Program, Organization, and Object, and Trial Balance by Fund
reports for fiscal years 2005 and 2006.
This audit was conducted in accordance with government auditing standards.
The Auditor General and staff express appreciation to the board members, Executive
Director, and staff of the School Facilities Board for their cooperation and assistance
throughout the audit.
State of Arizona
page 14
Future new school construction costs will place
increasing demands on General Fund
Several factors are converging that will place increasing demands on the New School
Facilities program and on the General Fund, which is quickly becoming the
program’s sole source of support. Rising construction costs and rising student
enrollment are projected to create a need for new school construction expenditures
totaling $2 billion to $2.4 billion between fiscal years 2008 and 2012. Under the
current funding mechanism, all of this amount will have to come from the General
Fund because other sources of revenue used in previous years will be exhausted by
fiscal year 2008. Further, recent interpretations of minimum adequacy guidelines will
potentially increase the impact on the General Fund. SFB should seek a formal
Attorney General opinion to clarify its authority to make additional awards to pay for
design elements not previously spelled out in the guidelines.
Program provides General Fund monies to build new
schools
The New School Facilities program provides K-12 school districts monies to
purchase land and construct new school facilities to accommodate student
enrollment growth. SFB is required to provide monies when needed pursuant to
A.R.S. §15-2041. A district is eligible for funding if SFB-approved projections
indicate that additional space will be needed within the next 2 years for an
elementary school or within the next 3 years for a middle or high school.
According to a December 2006 report by the Texas Legislative Council, Arizona is
1 of 8 states that use a stand-alone agency to administer school facility funding.1
The Texas Legislative Council found that 35 states administer school facilities
funding within their state departments of education, including nearly all of the
states that provide facilities funding as basic aid, debt service aid, and state loans.
Office of the Auditor General
page 15
Arizona is 1 of 8 states
that use a stand-alone
agency to administer
school facility funding.
1 Texas Legislative Council. Facts at a Glance: State Roles in Financing Public School Facilities. Austin, TX: Texas Legislative
Council, December 2006.
FINDING 1
State of Arizona
page 16
Seven states use a different state agency or a combination of agencies to
administer their school facilities programs. For example, Maryland’s Board of
Public Works, which approves all state capital projects, also administers the Public
School Construction Program. Generally, according to the Texas report, programs
operated by departments of education have fewer staff and provide less oversight
than programs administered by a separate agency for facilities funding.
According to the 2006 Texas report, 46 states had programs to provide school
facilities funding. Thirteen states—Arizona, Arkansas, Colorado, Kansas,
Kentucky, Louisiana, Maine, Montana, New Hampshire, New York, Pennsylvania,
Rhode Island, and Texas—used general fund monies as the primary source of
state funding for new school construction. Nineteen states were currently using
general obligation or general revenue bond proceeds at the time of the 2006 Texas
report, either alone or in conjunction with other sources of funding. Several states
designated specific revenues to provide monies for school facilities. For example,
6 states used dedicated or appropriated lottery proceeds to provide school
funding, while 3 states used dedicated sales tax revenue. According to the report,
14 states were using or proposing to use a different revenue source, such as
cigarette tax proceeds, a state wagering tax, or criminal fines and unclaimed
property. Only 4 states had no role in helping local school districts pay for public
school facilities.
General Fund demands expected to increase
Arizona’s choice to fund new school construction from the General Fund makes
it particularly important for the Legislature to be aware of projected future new
school facilities construction costs. Construction inflation has affected the
funding needs for new school facilities and is expected to keep rising. In
addition, Arizona’s student population has risen substantially in recent years and
is expected to continue to grow well into the future. As a result, new school
construction cost projections call for increased amounts of funding that will raise
annual expenditures for new school construction from about $351 million in
fiscal year 2006 to an estimated $450 million to $544 million in fiscal year 2012.
Construction costs rising—Construction inflation has already had a
substantial effect on costs, particularly in fiscal years 2006 and 2007. To
address inflationary needs for new school construction, statute requires
the Joint Legislative Budget Committee (JLBC) to at least annually
develop or identify an index to adjust for construction market conditions.
JLBC has prepared these adjustments, and between fiscal years 2000
and 2005, the adopted increases ranged from zero to 5 percent, with
increases above 12 percent in fiscal years 2006 and 2007 (see textbox).
In a February 2007 letter, SFB asked JLBC to consider another 3 percent
increase. At the discretion of the JLBC Chairman, this request was not
included in the agenda for the March 29, 2007, JLBC meeting.
-A
Fiscal Year Index Amount
2000 3.1%
2001 5.0%
2002 0.6%
2003 0.0%1
2004 4.2%
2005 1.4%
2006 12.85%
2007 12.20%
1 JLBC did not adopt an inflation
adjustment in fiscal year 2003. In fiscal
year 2004, JLBC adopted a combined
adjustment for fiscal years 2003 and
2004.
Source: Auditor General staff summary of JLBC-adopted
indices.
Office of the Auditor General
page 17
According to a September 2006 report from the Associated General
Contractors of America, the excess of construction costs over general
inflation will likely persist for the foreseeable future.1 According to a 2005
survey of 167 public owners involved in construction projects throughout
the United States, the average price increase in 2005 was 13.2 percent.2
An October 2006 presentation to the Joint Legislative Budget Committee
by JLBC staff reported that in 2006, indices for construction inflation in
Phoenix were from 5.9 percent for all structures built with masonry bearing
walls to 13.1 percent for a 70,000-square-foot elementary school.3
Construction industry inflation is linked to demands and price increases
for materials such as steel, concrete, gas, and petroleum products, such
as asphalt.
Student enrollment continues to grow—Arizona’s K-12 student population
grew by almost 19 percent between fiscal years 1999 and 2006, and SFB
projections call for an increase of another 27 percent by 2015. As shown in Figure
3, the number of students enrolled in Arizona district schools, excluding charter
1 Simonson, Ken. AGC Construction Inflation Alert: The Continuing Sticker Shock. Arlington, VA: The Association of General
Contractors of America, September 2006.
2 PinnacleOne. The 2005 PinnacleOne Pulse of the U.S. Public Construction. Tempe, AZ: PinnacleOne, 2005.
3 JLBC staff presented four different indices. The lowest index, 5.9 percent, was the Marshall Valuation Service (MVS)
construction cost index for class C structures (masonry-bearing walls) for Phoenix. According to the presentation, schools
are typically class C structures. The highest index, 13.1 percent, was developed by PinnacleOne, a project management
firm, based on the cost of a 70,000-square-foot K-6 school in Phoenix. The other two indices were a nation-wide Bureau
of Economic Analysis index for state and local government investments-structures (7.9 percent) and an index for all types
of Phoenix-area construction, developed by international construction-consulting firm Rider, Hunt, Levett, & Bailey (11.27
percent).
Arizona’s K-12 student
population grew by
almost 19 percent
between fiscal years
1999 and 2006.
0
200,000
400,000
600,000
800,000
1,000,000
1,200,000
1,400,000
1,600,000
1,800,000
1999
2001
2003
2005
2007
2009
2011
2013
2015
2017
2019
2021
2023
2025
Fiscal Year
Actual Projected
Students
ADE DES UA
Figure 3: Actual and Projected Student Growth1
Fiscal Years 1999 through 2026
1 Actual student growth is based on districts’ 100th-day Average Daily Membership (ADM) that they report to the Arizona Department of Education
(ADE). Student growth projections are prepared by SFB staff based on projected ADM calculated from Arizona Department of Economic Security
(DES) and University of Arizona (UA) population projections.
Source: Auditor General staff analysis of Annual Report of the Superintendent of Public Instruction Volume I Fiscal Year 2005-2006 and SFB staff
analysis of DES and UA population projections.
schools, increased from approximately 800,000 in fiscal year 2001 to more than
900,000 in fiscal year 2006, and because of continued increases expected in the
State’s overall population, SFB projects that the number of students will grow to
more than 1.2 million by 2017. These projections rely on population projections
produced by the Arizona Department of Economic Security (DES), which projects
that Arizona’s population, which was approximately 6.4 million in 2007, will grow to
7.9 million by 2015. Similarly, the U.S. Census Bureau and the University of Arizona
also project continued growth in the State’s population, to 7.4 million by July 1,
2015, according to the U.S. Census Bureau, and to 8.4 million by 2016, according
to the University of Arizona. According to the U.S. Census Bureau, Arizona was the
fastest-growing state in the nation between July 1, 2005 and July 1, 2006.
Combination of factors expected to increase new school
construction funding demands in future—Because of student
enrollment growth and rising costs of construction materials, increased new
school construction funding demands can be expected. For fiscal year 2007, SFB
staff estimated that SFB will spend approximately $350.6 million for new school
construction projects. Using different estimating approaches, JLBC and SFB staff
projected fiscal year 2012 costs of $450 million (JLBC) and either $487 million or
$544 million (SFB staff) depending on the population growth estimates used.
Between fiscal year 2008 and fiscal year 2012, JLBC projected that the total cost
for new school construction will be $2.05 billion, while SFB staff projected either
$2.25 billion or $2.35 billion in costs for the same period. Figure 4 (see page 19)
shows the year-by-year projections, which are based on the following
methodologies:
􀁺􇩊 JLBC used 10-year averages to estimate future student enrollment
growth and inflation. Specifically, JLBC used U.S. Census Bureau figures
for fiscal years 1997 through 2002 and Arizona Blue Chip figures for fiscal
years 2003 to 2006 and calculated that Arizona’s population had grown
by 3 percent per year, on average, during the 10-year period. JLBC used
the Gross Domestic Product (GDP) deflator compiled by Global Insight
for fiscal years 1997 through 2006 and calculated that average inflation
was 2 percent per year during the 10-year period. JLBC then combined
the two averages to obtain a total increase of 5 percent, and applied that
rate each year to determine future costs. Using these estimates, JLBC
calculated that the cost for cash financing of new school construction will
increase to approximately $450 million for fiscal year 2012.
􀁺􇩓 SFB staff prepared two projections, using two different population growth
estimates. First, using an estimated annual growth rate ranging from 2.57
to 2.97 percent based on information from DES, SFB staff projected that
the number of students will grow by 137,436 between 2008 and 2012.
Using an estimated annual inflation rate of 4.92 percent based on an
average of the JLBC-adopted inflation increases for fiscal years 2000
through 2007, SFB staff estimated the cost for new school construction
for fiscal year 2012 will be approximately $487 million if DES population
estimates are correct. Second, using an estimated student growth rate of
State of Arizona
page 18
2.87 percent based on information from the University of Arizona's Eller
College of Management (UA), SFB staff projected a need for
approximately 14.2 million square feet of new school space between
fiscal years 2008 and 2012. Using the same estimated inflation rate of
4.92 percent, SFB staff estimated the cost for new school construction for
fiscal year 2012 will be approximately $544 million if UA population
estimates are correct.
Further, nearly the full amount of these projected costs will need to be funded from
new appropriations to the New School Facilities Fund, under the current funding
mechanism. In prior years SFB has had a positive balance in its New School
Facilities Fund, and received approximately $900 million in revenues from lease-to-own
agreements entered into during fiscal years 2003 through 2006. However, by
the end of fiscal year 2008, SFB staff estimate that all of these lease-to-own
revenues will have been spent and the New School Facilities Fund’s fund balance
will also be gone.1 In fiscal year 2008, SFB estimated that it will receive $5 million
in rental income, but all of its other revenues for this Fund will come from
appropriations.
Office of the Auditor General
page 19
1 The Legislature could authorize use of lease-to-own agreements in the future. However, Laws 2006, Ch. 353, §29 states
that it is the Legislature’s intent that as a consequence of appropriating $250 million to the New School Facilities Fund in
fiscal year 2007, it does not intend to appropriate any future amounts to make payments for any lease-to-own
transactions entered into in fiscal year 2007.
Figure 4: Comparison of JLBC- and SFB-Projected Costs for New School Construction
Fiscal Years 2008 through 2012
Source: Auditor General staff analysis of cost projections based upon population projections prepared
by JLBC and SFB.
$370 $389 $408
$428
$450
$415 $432 $449
$468 $487
$401
$433
$467
$504
$544
$0
$100
$200
$300
$400
$500
$600
$700
2008 2009 2010 2011 2012
Millions
Fiscal Year
JLBC SFB —using DES information SFB—using UA information
JLBC total cost = $2.05 billion
SFB total costs = $2.25 billion (DES) and $2.35 billion (UA)
SFB staff projected a
need for approximately
14.2 million square feet of
new school space
between fiscal years 2008
and 2012.
State of Arizona
page 20
Recent SFB interpretations may result in greater General
Fund impact
SFB interpretations of minimum adequacy guidelines, which are used to determine
awards in excess of the statutory funding formula amount, will potentially increase the
impact on the General Fund under the current funding mechanism. Statute
establishes the amount per square foot that SFB must provide to accommodate
enrollment growth, but it also allows SFB to distribute money in excess of the
statutory amount to accommodate inflation based on an index identified by JLBC
and other specified factors. SFB has made such additional awards beyond the
statutory amount, which totaled $31.8 million in fiscal year 2007. Although SFB
management explained that the awards were necessary to compensate for inflation
and allow districts to build schools comparable to those built in previous years using
the statutory formula amount, the additional awards may exceed SFB's statutory
authority because they were not based on the factors specified in statute. To
determine if distributing these additional monies is within the scope of its authority,
SFB should seek a formal Attorney General opinion and then follow the Attorney
General's advice.
SFB can distribute monies in excess of statutory formula amount—
As required by A.R.S. §15-2041, SFB staff calculate new construction award
amounts based on the number of students, the required minimum square feet per
student, and a cost per square foot. The statute specifies four factors that may
increase the cost per square foot amount: (1) an annual adjustment for market
conditions based on an index identified by JLBC, (2) a 5 percent adjustment for
schools located in rural areas, (3) geographic conditions, and (4) site conditions.
SFB makes additional awards to districts—If a district believes it cannot
build a school using the calculated amount, SFB allows it to request additional
monies. As part of its application to SFB, the district must prove it cannot build a
school that meets the minimum adequacy guidelines with the formula amount.
During fiscal years 2006 and 2007, SFB awarded additional monies for 10 out of
26 and 23 out of 27 new construction projects, respectively. The additional awards
totaled $20.4 million in fiscal year 2006 (an increase of approximately 7 percent
over the statutory formula total of $292.3 million) and $31.8 million in fiscal year
2007 (an increase of approximately 11 percent over the formula total of $279.9
million).
To guide staff in determining what SFB will pay for, it has issued interpretations of
minimum adequacy guidelines. Some of these interpretations are intended to
reduce costs, such as a requirement that specifies the maximum number of
buildings on a school campus that SFB will pay for. A campus with more buildings
has greater costs because of utility, sidewalk, and other connections between
buildings and the need to duplicate certain infrastructure components in each
building. Other interpretations are meant to allow districts to include design
Office of the Auditor General
page 21
elements commonly included in schools built in previous years. For example,
although minimum adequacy guidelines do not require playgrounds in K-6
schools, SFB staff reported that districts included them in their schools and paid
for them using formula monies before rising costs reduced what the formula
amounts would cover. SFB staff reported that other factors have also reduced what
districts can build with formula monies. For example, SFB staff reported that some
local governments have increased permit fees and stopped providing fire lanes,
driveways, and sidewalks adjacent to schools, forcing districts to pay for them as
part of school construction. In its February 2007 meeting, the Board voted to
provide monies for playgrounds and other design elements not previously spelled
out in minimum adequacy guidelines, as shown in Table 3. SFB staff estimated that
these interpretations will add $7.12 per square foot to the total cost of building a
new school.
Table 3: SFB New Interpretations to Minimum Adequacy Guidelines1
Item
(N)ew or
(R)evised
Standard Suggested Application
Total Estimated
Cost2
Estimated Cost
per
Square Foot
Flooring R Flooring (carpet or vinyl
composition tile) throughout
the school, and tile floors in
bathrooms $ 96,000 $1.20
Gym floors R One 8,400 square-foot floor 109,000 1.36
Millwork R 10 linear feet per classroom 76,000 0.95
Exterior lighting N Exterior lights every 50 feet
and parking lot lights 36,200 0.45
Canopies N Exterior canopy square
footage equal to 1 percent of
interior square footage 16,000 0.20
Playground
structures
N Two playground structures
with canopies for each K-6
campus 130,000 1.63
Landscaping N 1 percent of total budget
allowed for landscaping 106,280 1.33
Total $569,480 $7.12
¹ Applied to new schools built after February 1, 2007.
2 Based upon an average 80,000 square-foot school.
Source: Auditor General staff analysis of SFB board meeting packet for the February 1, 2007, board meeting and
information provided by SFB in April 2007.
SFB distributions may exceed statutory authority—In making its awards
of additional monies to districts, SFB relies on a 2004 Attorney General opinion that
answered two questions about adjusting awards after a project was approved. In
the opinion, the Attorney General concluded that SFB could adjust the approved
base cost for good cause. Specifically, the opinion said SFB may award an
inflationary increase for good cause, for example if project delays justify the
change. Relying on the statute, the opinion defined the inflationary increase as the
annual adjustment for market conditions based on an index identified or
developed by JLBC.
Although SFB's Attorney General representative refers to the additional awards as
inflationary increases, the additional awards are not based on the annual JLBC
adjustment. Instead, they are calculated to pay for design features that, according
to SFB staff, were commonly included in schools built in previous years. Adding
monies to pay for design features not included in the minimum adequacy
guidelines, such as playgrounds, in order to compensate for rising costs, appears
to go beyond the Attorney General's 2004 opinion.
To ensure its awards of monies in excess of the statutory formula amount are within
the scope of its authority, SFB should seek a formal opinion from the Attorney
General to determine whether it has the statutory authority to award additional
monies to pay for specific design features based on SFB’s interpretation of the
minimum adequacy guidelines. Once the opinion is received, SFB should comply
with the opinion based on its interpretation of the minimum adequacy guidelines.
Recommendations:
1. To ensure its awards of monies to school districts in excess of the statutory
funding formula amount are within the scope of its statutory authority, SFB
should seek a formal opinion from the Attorney General to determine whether it
has statutory authority to award additional monies to pay for specific design
features.
2. Once the opinion is received, SFB should comply with the opinion.
State of Arizona
page 22
Office of the Auditor General
page 23
Building renewal formula may need modification
The Legislature should consider modifying the school district building renewal
funding formula. The Legislature has not used the formula to determine funding
levels in recent years and has several times passed bills with changes designed to
make the formula more workable. The Governor has vetoed these changes, citing
concerns from a pending lawsuit, which is awaiting a final court order. In June 2007,
the Legislature established a task force to review and make potential
recommendations to change the building renewal formula. Modifying and using the
formula would help make funding more predictable for school districts. In the past,
modifications studied and proposed included changing how older buildings and
portables are treated, using replacement costs instead of new construction costs,
and revising the assumptions for determining square footage.
Statute contains funding formula
A.R.S. §15-2031 requires SFB to use a statutorily prescribed funding formula to
determine districts’ annual building renewal amounts and to distribute the monies
after an annual review of the distributions by the Joint Committee on Capital
Review. The statutorily prescribed formula (see textbox, page 24) is based on a
formula created by two facilities management experts, Douglas Sherman and
William Dergis, to quantify the total amount of money needed for building renewal
for a group of buildings in a particular year. The formula is not a technique to
determine how much money needs to be spent on any one building in any one
year, but considers that all of the dollars calculated by the formula are
pooled in a fund to support major renewal projects. Under the formula,
the available monies in a given year can be used to completely renew
one building or to partially renew several buildings.
The Sherman-Dergis formula is well known and is used by other
Arizona agencies. The Arizona Department of Administration (ADOA),
the Board of Regents (ABOR), and the Department of Transportation
(ADOT) use it to determine annual building renewal allocations for their
A.R.S. §15-2031
requires SFB to use a
statutorily prescribed
funding formula to
determine districts’
annual building renewal
money distributions.
FINDING 2
Building renewal—A
budgeting mechanism used by a
state to attempt to preserve its
buildings. It involves repairing or
reworking of a building that will
result in maintaining or extending
its useful life.
State of Arizona
page 24
state-owned or occupied buildings and to make recommendations to the
Legislature on their annual building renewal appropriations. As of August 29,
2006, this formula was used to determine the annual funding for 5,365 ADOA,
ADOT, and ABOR building structures in Arizona. In 2000, the Legislature
established a Joint Legislative Study Committee that included representatives
from the three agencies to study this formula to determine its adequacy and
the building renewal system process to determine its effectiveness. The
Committee found that the formula provides adequate support for state
building renewal needs and the State should adequately fund building
renewal in order to avoid long-term costs of deferred maintenance. However,
the study did not examine building renewal for school districts.
Legislature has used various mechanisms to determine
funding
The Legislature has generally not funded the Building Renewal Fund at the level
calculated by the formula. Instead, the Legislature has used various other
mechanisms to determine annual appropriations for the school district building
renewal program.
As illustrated by the textbox, the Legislature funded this
program as prescribed in statute in fiscal year 2001 but
provided different amounts in other years. For example,
it provided a portion of the formula amount in fiscal
years 2002 and 2003 and used a different formula for
fiscal years 2005, 2006, and 2007.
As shown in Figure 5 (see page 25), under these
various approaches, actual appropriations totaled
$606.8 million during fiscal years 1999 through 2007,
compared with funding of $1.14 billion that would have
been provided if the building renewal program had
been funded to the formula. SFB distributes building
renewal monies to each district based upon the
amount the Legislature appropriates each year.
Excluding fiscal years 2001 (when funding was provided using the statutory
formula) and 2004 (when no funding was provided), these distributions have
ranged from 30 to 76 percent of the amount districts would have received if the
Legislature had fully funded the program based on the funding formula.
Arizona building renewal
formula
The components of the formula are:
1. Building square footage
2. Building age
3. New construction cost per
square foot
Source: Auditor General staff analysis of A.R.S. §15-2031.
The school district building renewal funding
history for fiscal years 1999 through 2007
1999—Funding based on Students FIRST legislation
2000—Funding reflects 10 percent increase from previous year
2001—Full funding based on the statutory building renewal
formula
2002—Partial funding based on the building renewal formula
2003—Partial funding based on the building renewal formula
2004—No funding
2005—Full funding of a revised, lower formula
2006—Full funding of a revised, lower formula
2007—Full funding of a revised, lower formula
The Legislature has
generally not funded the
Building Renewal Fund at
the level the formula
indicates it should be.
Office of the Auditor General
page 25
Attempts to change formula were vetoed; litigation
prompting vetoes awaits final court order
There have been several proposals for modifying the building renewal formula in
the past. In the 2003, 2004, 2005, and 2006 legislative sessions, the Legislature
passed bills that would have changed the formula, but each time the Governor
vetoed these bills, citing pending lawsuits. Specifically, in 1999 and 2001, eight
districts filed lawsuits to force the Legislature to fully fund the building renewal
formula under Students FIRST. The Governor’s vetoes were based on a concern
that altering the formula could adversely impact the State’s ability to defend or
favorably settle the litigation.
The litigation that prompted the Governor’s veto is awaiting the final order of the
Superior Court. The Court combined the eight districts’ lawsuits into a single case.
In October 2006, the Court found in favor of the State, granting summary judgment
because all the districts had not exhausted all available sources of funding to
The Legislature passed
bills that would have
changed the formula,
but each time the
Governor vetoed these
bills, citing pending
lawsuits.
Figure 5: Comparison of Formula-Based and Actual Appropriations
of Building Renewal Monies
Fiscal Years 1999 through 20071
(Unaudited)
Fiscal Year
Formula-Based Appropriation Actual Appropriation
Source: Auditor General staff analysis of JLBC appropriations reports for fiscal years 1999 through 2007.
Total Formula-Based Appropriations = $1.14 billion
Total Actual Appropriations = $606.8 million
1 Fiscal years 2003 and 2004 amounts for the formula-based appropriation were received from SFB.
0
20
40
60
80
100
120
140
160
180
1999 2000 2001 2002 2003 2004 2005 2006 2007
Millions
State of Arizona
page 26
address their needs, such as the Emergency
Deficiencies Correction Fund monies. (See Other
Pertinent Information, pages 51 through 53, for more
information on the Emergency Deficiencies program.)
Further, in June 2007, the State requested the Court to
dismiss the case because districts could not yet prove
their claim. The State is awaiting a final court order.
The Legislature has already established a task force that
will study the building renewal formula. In June 2007, the
Governor signed HB2792, which establishes a task force
consisting of 20 members (see textbox). The K-12
School Facilities Task Force's duties include reviewing
and recommending potential changes to the building
renewal formula. An initial report must be submitted by
December 1, 2007, and a final report summarizing
findings and recommendations is due by December 1,
2008, to the Governor, the President of the Senate, and
the Speaker of the House of Representatives.
Revising formula could make funding more
predictable for districts
A revised formula could help school districts better manage their monies by making
future funding more predictable. As of June 30, 2005, several districts held significant
balances of building renewal funds, in part because they were saving for major
renovations, but also because they did not know how much funding they would
receive in subsequent years. Modifying the formula could make funding more
predictable and help districts better manage the use of their building renewal monies.
Some districts accumulated large balances—Past efforts to change the
formula arose, in part, because the formula appeared to provide too much money
since it allowed many districts to accumulate large fund balances. As illustrated in
Table 4 (see page 27), districts’ ending fund balances totaled approximately $89.6
million for fiscal year 2005 and decreased to approximately $83.8 million for fiscal
year 2006. Six of these districts held approximately 35 to 37 percent of the overall
Building Renewal Fund balance for fiscal years 2005 and 2006, respectively.
Because districts cannot predict building renewal funding awards, it is difficult to
manage their building renewal projects. Auditors interviewed officials in seven
districts to learn how funding fluctuations had affected their ability to manage
building renewal projects and to find out why the districts had accumulated large
Modifying the formula
could make funding
more predictable and
help districts better
manage the use of their
building renewal
monies.
K-12 School Facilities Task Force Members
􀁺􇩆 Five Senate members
􀁺􇩆 Five House members
􀁺􇩏 One school district teacher
􀁺􇩔 Two members from the business community
􀁺􇩏 One private citizen representing a taxpayer
organization
􀁺􇩏 One member with expertise in urban school district
facilities management
􀁺􇩏 One member with expertise in rural school district
facilities management
􀁺􇩏 One member with public finance knowledge and
experience
􀁺􇩏 One member with school finance knowledge and
experience in a public school system
􀁺􇩏 One member with housing development knowledge
and experience
􀁺􇩓 SFB's Executive Director or his designee, serving as
an advisory nonvoting member
Source: Laws 2007, Chapter 266, §4.
Office of the Auditor General
page 27
fund balances. According to district officials, not receiving the full building renewal
funding amount in the past several years has had several effects. Specifically:
􀁺􇩒 Repairs delayed—Officials in five out of seven districts reported that they had
delayed building renewal projects because they had not received the
projected amount of money. For example, according to one district official, the
district delayed some renovation and repair projects until it could obtain bond
proceeds because the district did not have enough building renewal monies
to address all of its needs. Specifically, the district proposed using bond
proceeds to pay for needed renovations and repairs totaling $79 million,
including replacing portable buildings that are about 40 years old and had
rotten flooring, which allow animals to get into the structure. Other proposed
projects included roofing repairs, sewer line replacement, and renovating a
bathroom that was closed because of mold. This large district had received
$6.6 million in building renewal monies in fiscal year 2006 and had a year-end
Building Renewal Fund fund balance of $4.5 million. However, the district had
already committed approximately $4.5 million of the ending fund balance for
other building renewal needs and had only $8,996.55 available as of June 30,
2006.
􀁺􇩆 Fund balances used to save for large projects and to compensate for
fluctuations—Officials in three out of seven districts explained that they must
carry forward building renewal monies to pay for major renovations in a future
year. For example, one large urban district that had a $5.9 million Building
Table 4: Comparison of Number of Districts and
Unexpended End of Year Building Renewal Fund Balances1
Fiscal Years 2005 and 2006
(Unaudited)
2005 2006
Range of Ending Fund Balances
Number
of
Districts
Total Fund
Balances
(In Millions)
Number
of
Districts
Total Fund
Balances
(In Millions)
($150,001)–($1) 4 ($ 0.22) 4 ($ 0.05)
$0 1 0.00 0 0.00
$1—$50,000 63 1.10 58 1.02
$50,001—$100,000 31 2.29 29 2.01
$100,001—$250,000 41 6.55 48 8.21
$250,001—$500,000 33 12.07 33 11.20
$500,001—$1,000,000 18 12.58 19 12.73
$1,000,001—$3,000,000 12 21.96 11 19.86
$3,000,001—$8,000,000 6 33.28 6 28.80
Total $89.61 $83.78
___________________
1 In addition, as of June 30, 2006, SFB held approximately $11.6 million of building renewal monies for districts that did
not comply with statutorily established reporting requirements.
Source: Auditor General staff analysis of the Annual Financial Reports for fiscal years 2005 and 2006 submitted by districts to
the Arizona Department of Education.
State of Arizona
page 28
Renewal Fund ending fund balance as of fiscal year 2006 intended to spend
$10 million in fiscal year 2007 and $6.5 million in fiscal year 2008, including
bond proceeds, to complete building renewal projects including roofing
renovation and retrofitting. This is consistent with the intent of the building
renewal formula, which is not meant to determine how much money needs to
be spent on any one building in any one year, but to allow for pooling monies
to support major renewal projects.
Further, officials in two out of the seven districts explained that because
building renewal funding has greatly fluctuated from year to year, they maintain
a fund balance for unexpected needs. For example, one official reported that
one year the district used some of its Building Renewal Fund fund balance to
pay for unexpected roofing and flooding damage caused by heavy monsoon
rains.
􀁺􇩄 Districts use bonds to pay for some repairs and renovations—Officials in four
out of seven districts reported that despite having Building Renewal Fund fund
balances, these balances often represent only a fraction of their repair and
renovation needs. Although some of the proposed repair and renovation
projects paid for with bond monies may not be eligible for building renewal
monies, they illustrate the districts' overall repair and renovation needs. In fact,
these districts have issued bonds far in excess of their Building Renewal Fund
fund balances to meet these needs. For example, a large district that had a
fiscal year 2006 year-end Building Renewal Fund fund balance of $5.1 million
planned to use approximately $183 million in bond proceeds to renovate
science classrooms and libraries, and to provide drainage, waterproofing, and
roof repairs. The district had received $300,000 in building renewal monies in
fiscal year 2006. Another district that had a fiscal year 2006 year-end Building
Renewal Fund fund balance of $400,000 hired a consultant to assess its
needs. The consultant estimated that the district needed approximately $110
million to address its needs, including returning buildings, grounds, buses,
and classrooms to an acceptable standard. The district prioritized the projects
and revised this estimate to $65 million. The district requested a bond
authorization of $53.1 million in November 2006 and plans to use
approximately $35.5 million in bond proceeds for building renovation and
repair. The district had received $1.4 million in building renewal monies in fiscal
year 2006.
Revised formula could allow districts to better manage their building
renewal monies—The Legislature could help districts better manage the use
of their building renewal monies by establishing a funding mechanism that would
allow districts to predict funding. A.R.S. §15-2031(F) requires districts to prepare a
3-year plan that details how they will use building renewal monies. However, SFB
knows only how much money districts will receive the first year of the 3-year plan.
Although some of the
proposed repair and
renovation projects
funded with bond
monies may not be
eligible for building
renewal monies, they
illustrate the districts'
overall repair and
renovation needs.
Office of the Auditor General
page 29
Therefore, it requires districts to prepare and submit plans based on the funding
formula amount for years two and three. However, since funding does not always
equal the amounts in the plan, districts are not always able to follow the submitted
plans.
Previously proposed changes addressed various aspects
of formula
The Legislature should consider modifying the school district building renewal
funding formula. Proposed formula modifications that have been advanced, both
as JLBC recommendations and as part of past legislation, included changing how
older buildings and portable buildings are treated, using replacement cost instead
of new construction cost, and revising the assumptions for the costs per square
feet. To provide additional perspective that the Legislature may wish to consider in
reviewing the formula, auditors contacted William Dergis, one of the creators of the
building renewal formula, and asked for his views regarding potential changes in
these areas. The changes recommended by JLBC, together with Mr. Dergis’
comments on those proposed changes, follow:
􀁺􇩌 Limiting the building age to 30 years—The formula considers the life of each
building to be 50 years. Based on the formula, an older building’s need for
building renewal funding is projected to increase every year up to 50 years. In
its fiscal year 2005 budget recommendations, JLBC recommended reducing
the building life to 30 years, meaning that older buildings’ funding needs
would be considered the same as those of a 30-year-old building. Mr. Dergis
stated that the lifespan of buildings is generally 50 years, which is commonly
accepted in the industry. He did not recommend reducing the building life to
30 years.
􀁺􇩔 Treating portable buildings the same as permanent buildings—The formula
provides six times as much money for portable buildings as for permanent
buildings to recognize the shorter lifespan of portable buildings. JLBC
recommended treating portable buildings like permanent buildings because
although portable buildings have a shorter life than permanent buildings, the
life of portable building systems is about the same as a permanent building
system. However, Mr. Dergis stated that there should be a premium for
portable buildings because these buildings have a lower original unit cost and
they are usually not built to last as long as they are used. Therefore, they often
incur more renewal work during their lifetime than would a permanent building
of the same size. He did not specify how portable buildings should be treated
but recommended using local data to determine an adequate multiplier.
Proposed formula
modifications have been
advanced, both as
JLBC recommendations
and as part of past
legislation.
Districts are not always
able to follow the
submitted plans since
funding does not always
equal the amounts in
the plan.
State of Arizona
page 30
􀁺􇩕 Using the replacement cost to develop the replacement value of the
building—The formula uses the new school construction cost, which includes
the cost of furniture, equipment, and unexpected construction costs. JLBC
recommended using the replacement cost, which excludes equipment,
furniture, and other contingencies, when computing building renewal needs.
Mr. Dergis explained that the replacement cost should represent the size and
the complexity of a building. Complexity refers to the type of facilities within a
building, such as science laboratories. However, he recommended that items
like furniture and moveable equipment should not be considered as part of the
replacement cost.
􀁺􇩍 Making the per-student square footage in accordance with minimum
adequacy guidelines—The formula uses a per-student square footage that is
higher than either actual square footage or minimum square footage based
on the minimum adequacy guidelines. The additional square footage is
included to allow for student growth. However, JLBC recommended using the
minimum square footage standard instead. Mr. Dergis said he did not have
enough information to comment on this change.
Recommendation:
1. The Legislature should consider modifying the school district building renewal
funding formula to help districts better manage their building renewal monies.
Office of the Auditor General
page 31
SFB should improve oversight of districts’ use of
building renewal monies
SFB should improve its oversight and reporting of Building Renewal Fund
expenditures. As prescribed by statute, Building Renewal Fund monies are restricted
for specific purposes. SFB is responsible for administering and distributing monies
from the Building Renewal Fund; however, it does not have a process in place to
review districts’ annual building renewal expenditures reports. Some districts have
used building renewal funds inappropriately, such as to replace playground
structures and to purchase stage curtains and a projector screen. SFB should
establish and implement policies and procedures for reviewing districts’ building
renewal expenditure reports and taking appropriate action.
Building renewal monies
restricted to specific
purposes
SFB administers the Building
Renewal Fund for the purpose of
maintaining the adequacy of
existing school facilities, including
academic space and other
buildings owned by school districts.
These monies may only be used to
pay for items or services that will
help maintain or extend the useful
life of buildings (see textbox). For
instance, a district can use these
funds for the replacement or repair
of a roof, but cannot use them to
pay for exterior beautification, such
as landscaping.
FINDING 3
Approved and prohibited uses of Building Renewal Fund
monies
Approved uses:
􀁺􇩂 Building renovations and major repairs
􀁺􇩕 Upgrades to maintain or extend a building’s useful life
􀁺􇩉 Infrastructure costs
􀁺􇩐 Portable or modular building placement or relocation
Prohibited uses:
􀁺􇩎 New construction
􀁺􇩁 Aesthetic or preferential remodeling of interior space
􀁺􇩅 Exterior beautification
􀁺􇩄 Demolition
􀁺􇩐 Purchase of soft capital items such as textbooks
􀁺􇩍 Most routine maintenance, except:
• Districts may use up to 8 percent of their building renewal
allocations for preventive maintenance
• Schools may use building renewal monies to bring
inadequately maintained buildings into compliance with district
routine maintenance guidelines.
Source: Auditor General staff summary of A.R.S. §15-2031 and SFB’s Building Renewal Policy.
SFB staff provide limited oversight
Although SFB staff review school districts’ building renewal plans, they could
provide better oversight of districts’ building renewal expenditure reports. To
comply with reporting requirements, districts must submit two reports to SFB every
year. Specifically, statute requires districts to submit building renewal plans and
report building renewal projects funded in the prior year and remaining fund
balances. Districts cannot receive building renewal monies if they do not submit
the required reports. These reports help to educate districts on the appropriate
uses of building renewal monies and can be used to determine if districts used
monies as allowed by statute.
SFB staff review how districts plan to use building renewal monies—
A.R.S. §15-2031(F) requires that by October 15 of each year, each district must
submit a 3-year plan to SFB showing how it will use building renewal monies. The
plan must include a list of projects and their expected costs for each school in the
district. SFB staff with construction knowledge, called liaisons, review the plans to
determine if the projects meet statutory requirements for building renewal monies
and if the estimated costs appear to be reasonable. If a district’s plan includes
inappropriate planned expenditures, the district must revise and resubmit it. The
liaisons assist districts in revising their plans and in the process they educate
districts on appropriate uses of these monies. Each district’s building renewal plan
must be approved by the Board before a district can receive building renewal
monies for the following year. To help districts comply with the requirement to
submit their plans, SFB introduced a Web-based program for the submittal of
these reports in September 2006.
SFB staff provide limited oversight of actual expenditures—Under the
same statute, by October 15 of each year, each district must also submit to SFB
an annual report showing how it used building renewal monies in the previous
fiscal year. To comply with this requirement, districts must submit building renewal
expenditure reports detailing a list of projects paid for with building renewal
monies, the actual costs of the projects, and total building renewal expenditures.
Before this audit began, SFB staff collected the reports and used them to compile
an annual report required by A.R.S. §15-2002 that shows each district’s Building
Renewal Fund’s beginning and ending fund balances and total building renewal
revenues and expenditures during the year. They did not review the reports in
depth. However, during the audit, SFB liaisons began to review the districts’
expenditure reports to determine if districts had used monies in accordance with
statute. According to SFB management, there has always been some level of
review of building renewal expenditures, but they were not able to provide
evidence of the review or the extent of it.
State of Arizona
page 32
Statute requires districts
to submit building
renewal plans and
reports showing how
they used building
renewal monies.
SFB staff should strengthen oversight
SFB staff need to provide greater oversight to better ensure districts spend
building renewal monies appropriately. Both auditors and SFB staff identified
instances of school districts inappropriately using building renewal monies. During
the audit, the SFB liaisons began to evaluate expenditures for appropriateness.
However, SFB staff have not yet developed a standard process for this review, and
the liaisons differ in their practices. In addition, because there is no process for
districts to challenge SFB’s findings, SFB staff have chosen not to report
inappropriate expenditures to the Superintendent of Public Instruction as required
by statute.
Some building renewal expenditures inappropriate—Both auditors and
SFB liaisons identified some inappropriate building renewal expenditures in a
review of districts’ expenditure reports. For fiscal year 2005, districts reported 2,945
building renewal expenditures totaling approximately $40.6 million to SFB. Based
solely on their descriptions in the reports, 193 of the expenditures totaling
approximately $4 million appeared to be potentially inappropriate uses of building
renewal monies. For example, the expenditures included new construction, land
improvements, and irrigation. Many of these expenditures may be appropriate.
However, SFB staff can only speculate whether they are appropriate until they
analyze them. In an in-depth review of 8 of the 193 expenditures, including
discussing them with district and SFB officials and examining supporting
documentation, auditors determined that 6 of the 8 expenditures did not meet
statutory criteria for approved uses of building renewal monies. For example:
􀁺􇩐 Playground structure replacement—A district replaced an older playground
structure totaling $88,293. The structure is not part of the building and its
replacement would not expand or maintain the useful life of the facility.
􀁺􇩅 Equipment—A district purchased stage curtains and a projector screen for its
auditorium totaling $35,063. These items are considered soft capital items
and are prohibited by statute.
􀁺􇩄 Debt repayment—A district received a loan from a private entity in 1997, prior
to SFB’s establishment, to do renovations at six schools. The district used
$240,165 of its building renewal monies in fiscal year 2005 to repay the loan.
However, statute does not authorize building renewal monies to be used to
repay debt.
Auditors also identified inappropriate building renewal expenditures in a review of
expenditures reported in the districts’ Annual Financial Reports (AFR) to the
Arizona Department of Education. In fiscal year 2005, districts’ AFRs reported
building renewal expenditures totaling approximately $44.2 million. Based on their
Office of the Auditor General
page 33
Auditors identified six
expenditures that did
not meet statutory
criteria.
State of Arizona
page 34
In their review of districts’
fiscal year 2006 building
renewal expenditures
reports, SFB liaisons
found several potentially
inappropriate
expenditures.
descriptions in the reports, approximately $8.8 million of these expenditures
appeared to be potentially inappropriate uses of building renewal monies. These
expenditures may be appropriate, but SFB staff can only speculate whether they
are appropriate until they analyze them. In an in-depth review of expenditures
submitted by three districts, including discussing them with district and SFB
officials and examining supporting documentation, auditors determined that some
expenditures did not meet statutory criteria for approved uses of building renewal
monies. For example:
􀁺􇩐 Public address system—A district replaced its public address system, which
included a DVD player, microphones, and cart, totaling $3,031. These items
are considered soft capital items and are prohibited by statute.
􀁺􇩌 Landscaping—A district excavated and fertilized a turf area for a total cost of
$2,282. This is considered exterior beautification and is prohibited by statute.
SFB liaisons also found potentially inappropriate expenditures. In their review of
districts’ fiscal year 2006 building renewal expenditures reports, the liaisons’ first
review of expenditures, the liaisons found several potentially inappropriate
expenditures. For example, districts reported using building renewal monies to
purchase a cafeteria dishwasher, new bleachers, and a new shade cover for a
playground. Districts also used the monies to redesign a bus drop-off and to install
a new irrigation system and partitions in a new restroom. According to SFB
officials, some of the potentially inappropriate expenditures might turn out to be
appropriate after the liaisons research them further. However, the liaisons identified
these expenditures as potentially inappropriate because they do not appear to
maintain or extend the useful life of buildings, which is a requirement for the use of
building renewal monies.
SFB should develop process for expenditure review—Although liaisons’
experience, knowledge of the statutes, and relationships with the districts make
them well-qualified to evaluate the appropriateness of building renewal
expenditures, the lack of defined procedures results in different approaches to
expenditure review among them. For example, when evaluating the
appropriateness of expenditures, one liaison checked them against the district’s
SFB-approved plan, but the other three liaisons did not report using the approved
plans as a tool during their expenditure reviews.
SFB has two possible options for conducting reviews of building renewal
expenditures:
􀁺􇩒 Review by SFB liaisons—SFB liaisons carried out a review of fiscal year 2006
expenditures during the audit, and have the experience and expertise to
conduct the review. Because the liaisons already have the knowledge and
expertise, and conduct the reviews of the district’s annual building renewal
Office of the Auditor General
page 35
plans, this would likely be the most efficient approach. It would take advantage
of existing expertise and would also help the liaisons carry out their ongoing
responsibility to train school district personnel on appropriate uses of building
renewal monies. Auditors estimated that although the review would add to
each liaison’s workload, the added work would total less than one full-time
employee.
According to SFB officials, SFB lacks the resources to implement a
comprehensive annual expenditure review. The Executive Director explained
that SFB does not have the staff, expertise, or funding it would need to
implement such a review. Specifically, although SFB officials agree that the
liaisons are best suited to provide the necessary oversight, they believe the
liaisons will face difficulties in conducting some of the required tasks such as
determining if expenditures are part of a larger project or are eligible as
preventive maintenance allowance. In its fiscal year 2008 budget request, the
SFB asked for two additional liaisons, citing the need to conduct building
renewal expenditure audits among other demands, such as increased
involvement during design and construction of new school facilities. The
Legislature appropriated $121,500 to hire two additional liaisons. However,
according to SFB officials, the associated funding is insufficient to
successfully recruit the needed liaisons.
􀁺􇩒 Review by contractor—As an alternative to using its own liaisons to conduct
the review, SFB could contract with an auditing firm to conduct state-wide
audits of building renewal expenditures. If SFB decides to contract out this
review, it should consider using an auditing firm that specializes in providing
construction auditing services, as it did when contracting for audits of
deficiency corrections projects. Further, it should consider whether the costs
of such a contract would exceed the costs of conducting the work in-house.
Whether SFB decides to conduct building renewal expenditure reviews in-house or
through using a contractor, it should develop and implement a review process.
This process should include researching how to identify inappropriate
expenditures. Research may include contacting districts to obtain clarification on
how they used these monies, obtaining documentation for the specific
expenditures, and seeking guidance from SFB’s Attorney General representative.
SFB staff have not taken action on inappropriate expenditures—SFB
has not followed a requirement in A.R.S. §15-2031 that requires that inappropriate
expenditures be reported to the Superintendent of Public Instruction, who is then
required to withhold other monies until the amount of inappropriate spending is
made up. The Executive Director explained that SFB has never done this because
it would not be fair to the districts to notify the Superintendent to withhold monies
without a process for the districts to challenge SFB staff’s determinations.
Therefore, SFB should develop such a process. First, SFB staff should make a
SFB should develop
and implement a review
process.
State of Arizona
page 36
preliminary assessment of the expenditures and research them to identify
inappropriate expenditures. Districts should then be granted the opportunity to
challenge SFB staff’s evaluations regarding the inappropriate expenditures if the
districts believe that the expenditures are appropriate. Subsequently, SFB should
make a final decision regarding appropriateness of the expenditures and report
inappropriate expenditures to the Superintendent of Public Instruction. Additionally,
SFB should develop and implement written policies and procedures that describe
the adopted review process for assessing the appropriateness of a district’s
building renewal expenditures.
Recommendations:
1. SFB staff should continue their efforts to improve the oversight of building
renewal expenditures by developing and implementing written policies and
procedures that describe the review process for assessing the appropriateness
of a district’s building renewal expenditures.
2. SFB should either require its liaisons to conduct annual reviews of building
renewal expenditures or contract out for such reviews. In making the decision,
SFB should consider the relative costs of both options.
3. SFB should provide districts an opportunity to challenge its staffs’ conclusions
regarding inappropriate expenditures.
4. Once the process is in place giving districts the opportunity to challenge SFB
staff’s conclusions, SFB should report inappropriate expenditures to the
Superintendent of Public Instruction as required by law.
Office of the Auditor General
page 37
Controls should be improved to ensure monies
paid out appropriately
SFB needs to improve its internal control framework to ensure that it appropriately
manages and pays out hundreds of millions of dollars annually for school districts’
projects including new school construction, deficiency correction, and emergency
deficiency correction projects and for building renewal. SFB is one of the State’s
highest recipients of legislatively appropriated monies. Although SFB has
implemented some internal controls over managing and paying for projects, it lacks
a complete set of controls, resulting in a risk of paying more for school districts’
projects than the projects were awarded. SFB should take steps to improve its
internal control policies and procedures to help ensure payments are appropriate.
SFB manages and pays out hundreds of millions of
dollars annually for school projects
SFB, one of the State’s highest recipients of legislatively appropriated monies,
pays out hundreds of millions of dollars each year for school districts’ projects.
Specifically, in fiscal year 2006, SFB received the State’s ninth-largest
appropriation and paid out more than $426 million for school districts’ new
construction, deficiency correction, and emergency deficiency correction
projects and for building renewal. SFB staff use a project-tracking database to
help calculate and keep track of payments for school districts’ projects and
building renewal. The database contains detailed information, including amounts
and dates of SFB awards to districts, as well as payment dates, amounts, and
payees. (See Finding 5, pages 43 through 50, for additional information on the
project-tracking database.)
FINDING 4
SFB paid out $426
million in fiscal year
2006 for school districts’
projects and building
renewal.
State of Arizona
page 38
SFB risks overpaying because essential internal controls
are not applied
Although SFB has implemented some internal controls over
managing and paying for school districts’ building projects, a
complete set of controls is lacking, resulting in a risk of paying
more than the award amount for school districts’ building
projects. Some SFB practices have not always been followed
because SFB lacks written policies and a training program. In
addition, SFB lacks some important controls. As a result, some
school districts have received overpayments for projects.
SFB has some good practices but they have not always been
followed—SFB has developed some good practices that are conducted prior
to paying school districts and vendors to help ensure that payments are
appropriate. For example, SFB has established an extensive upfront process to
help control and monitor the costs of building new schools. Specifically, school
districts must submit enrollment projections, capital plans, and various documents
throughout the process, including applications for new construction, cost
estimates, and schematic designs before any monies are awarded to the districts.
Additionally, districts must attend pre-bid meetings with SFB staff to discuss costs.
To establish project budgets, SFB staff review documents submitted by the
districts, calculate the statutory formula amount, determine any additional monies
over the statutory formula that the district needs, and present the recommended
project budget to SFB for approval. SFB staff use the approved budget to help
monitor projects on SFB's project-tracking database in order to avoid projects
going over budget. Additional controls SFB has put into place for payments to
districts include requiring documentation from districts to support amounts
requested and reviewing the documentation for appropriateness; obtaining
signatures from a district architect and the contractor to certify the supporting
documents; manually reviewing the project budget to ensure sufficient monies are
available; and separating duties so that different employees prepare payments,
approve payments, and enter payments on the State's accounting system.
However, staff did not follow SFB practices in two projects, resulting in
overpayments to districts. SFB does not have written policies and procedures to
ensure consistent performance of its practices or a training program to inform new
staff of the practices. Consequently, SFB made overpayments soon after hiring a
new business manager who was not familiar with the practices. Specifically, SFB
paid two school districts a total of more than $45,000 over the approved award
amount in March and May 2006. SFB staff discovered the errors during SFB’s final
close-out process that staff performed. SFB has recovered the overpaid monies
from one school district and is attempting to recover the monies from the other.
SFB staff discovered
overpayments for two
projects.
Internal controls—processes designed to
provide reasonable assurance regarding the
reliability of financial information, effectiveness and
efficiency of financial operations, and compliance
with applicable laws and regulations.
Source: American Institute of Certified Public Accountants. Statement on
Auditing Standards No. 55.
Office of the Auditor General
page 39
SFB lacked evidence of one important control—According to SFB’s
Executive Director, SFB reconciled payments information maintained in its project-tracking
database to the payments recorded in the state-wide accounting system
since the software’s implementation in fiscal year 2001. However, until December
2006, SFB did not retain evidence of these reconciliations. In addition, the
reconciliations were conducted at a high level that may not have detected all
errors. For fiscal year 2006, SFB staff reconciled the two systems for the first time.
SFB staff found an unreconcilable difference of more than $200,000 in its fiscal
year 2006 payments and identified changes needed in its project-tracking
database to properly track expenditures and allow it to reconcile these payments
in the future. Specifically, SFB created a new accounting code to record land
payments and added an identifier to track payments for land.
SFB has not applied another control to all projects—SFB has a process
for determining final payments that can also serve as an important control for
identifying overpayments and inaccurate information, but all projects are not
subject to the procedure. This close-out procedure requires school districts to
submit a close-out package notifying SFB when a new construction project is
complete. During the process, the Executive Director determines if the approved
budget was properly recorded and if the district is eligible to receive any remaining
funds. The value of this process is illustrated by its discovery of the two previously
mentioned payment errors in March and May 2006 in which school districts were
paid more than the award amounts.
Although the close-out process is a good control, auditors found several errors in
other projects that SFB had not discovered because, although the projects were
no longer active, SFB did not have a close-out package from the districts and
therefore the projects had not gone through the close-out process. Specifically, by
analyzing project information maintained in SFB’s project-tracking database from
June 1999 through November 2006, auditors identified 31 out of 530 new school
construction projects where the database indicated overpayments totaling
approximately $1.7 million had been made. In each of these cases, the database
showed that the project had a negative balance, indicating that expenditures had
exceeded awards. A review of 11 of these projects, with negative balances totaling
approximately $1.5 million, found that none of them had gone through the close-out
process. Auditors found several errors in the project-tracking database records
for these projects, and in 10 of the 11 cases, the negative balance resulted in part
from inaccurate recordkeeping. The errors included:
􀁺􇩉 Inaccurate awards—SFB awards were inaccurately recorded in the
project-tracker database for 9 out of 11 projects. The errors totaled $1.8
million.
􀁺􇩉 Inaccurate payment information—Two project payments were recorded
in the wrong project account in the database.
Auditors identified 31
out of 530 new school
construction projects
with expenditures
exceeding awards.
State of Arizona
page 40
􀁺􇩉 Incomplete recordkeeping—Complete project payment information was
not maintained by SFB staff for 7 out of 11 projects. Altogether, 27
transactions totaling approximately $14.1 million were missing supporting
documentation.
In addition to the database errors, auditors identified overpayments in 4 of the 11
projects where payments to districts exceeded SFB awards for these projects.
These overpayments totaled $63,200. For example, in one of these projects, SFB
had paid for an item that the district should have paid for. Specifically, SFB wrongly
paid $16,740 for a share of a monthly construction payment that was the school
district’s responsibility.
Because the projects had not gone through the close-out process, the errors had
not been discovered. After auditors pointed out the errors, SFB staff reviewed all
31 projects and are now taking appropriate action. In some cases, SFB is taking
more than one type of action. Specifically, SFB is asking districts to repay
approximately $23,000 for 2 projects, seeking increases in SFB awards totaling
approximately $200,000 for 15 projects, and correcting inaccurate award and
payment information for 15 projects.
The results of another review also illustrate the benefits of the close-out process.
Specifically, auditors reviewed six construction projects that had remaining award
balances between $0 and $10,000. Auditors found that three out of six new
construction projects had been completed and reviewed by SFB when performing
the close-out process. Therefore, auditors found no recordkeeping errors in any of
these new construction projects. However, the other three of these six projects
were missing supporting documentation for five transactions totaling $694,315.
Instead of waiting until districts submit a close-out package, SFB should initiate the
close-out procedure when the project award amount has all or nearly all been
distributed. For example, SFB could adopt a policy of conducting the close-out
procedure when it has paid out 95 or 100 per