Newberg School District Finances: Background

As we wait for Newberg School District to release the results of the financial audit for 2021-2022, here is some background information about what to expect from a financial audit and some context from previous years.

Here are the takeaways: 

• The last official audit for the 2020-2021 school year verified that the district had more than $9,000,000 in the bank as of June 30, 2021, before the current Board took office. The financial audit for last year, 2021-2022, is late. 
• The district has rehired Pauly Rogers & Co. after several years with a different auditing firm. This was not a choice, but was required when the auditing firm Wilcox Arredondo & Co. decided to stop all school audits and focus their business in a different direction.  
• Because of this change in firms, we should expect the audit to show that some practices need to change. Different auditing firms want complex school finances handled differently; recommended changes do NOT mean something was done wrong previously. 
• Due to declining enrollment, there have been plans in place since Fall of 2021 for money due back to the State School Fund. Any money owed to the State School Fund in May of 2023 is not a surprise, nor is it due to misreporting of enrollment.
• Finally, the current year 2022-2023 budget was based on a “carryover” of $7,200,000 from the 2021-2022 ending fund balance. If the audited ending fund balance for 2021-2022 comes in significantly lower than $7,200,000, questions need to be asked about what caused such a reduction after Dr. Morelock was fired.

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School Finances are really complex. For those who want all the details to support the above takeaways, read on:

First, some financial history. These are the undisputed facts until we get the official financial audit for last school year, 2021-22 (which Dr. Morelock was only part of for one third of the year): When Dr. Morelock started in 2018, the official audit had the ending fund balance for the 2016-2017 school year at less than $400,000. The last official audit (for the 2020-2021 school year) showed more than $9,000,000 in the bank as of June 30, 2021. (Click here, p.11.)

Second, some context about auditing firms for Newberg School District.The auditing firm Pauly Rogers & Co. has been rehired by the district to audit the books for the 2021-22 school year. This is after several years with Wilcox Arredondo & Co. The district did not choose this change; Wilcox Arredondo & Co. made the decision to stop auditing school districts (see this Board Packet from January of 2022, pg. 13.) This loss of an accounting firm to do school audits has caused difficulties for many school districts in Oregon, as there are now only two accounting firms to do the complex work of auditing schools in Oregon. Hiring Pauly Rogers after Wilcox Arredondo exited the auditing business is a rehire, since Pauly Rogers performed audits for Newberg before Wilcox Arredondo.

Auditing is really, really hard. It’s not just finances, but examining and making sure that districts are complying with the many different requirements from the different sources of funding. The number of revenue sources has significantly increased over the last six years, with Measure 98, High School Success, Student Investment Account (SIA), CTE funding, and Federal programs like the Elementary and Secondary School Emergency Relief Fund (ESSER I, II, and II). There are lots of statutes to understand and interpret, and this is likely one of the reasons there are so few companies willing to be in the school auditing business in Oregon.

Third, with a new auditing firm, we should expect findings which ask the district to change some practices. This is what happens when a different auditing firm is hired: they each want complex school finances handled differently. It does NOT mean what was done previously was wrong.

I was the School Board Secretary and heard auditing reports delivered to the Board by both Pauly Rogers and Wilcox Arredondo. It takes an in-depth presentation by someone who devotes their work life to this stuff to be able to interpret what is a significant finding, and what is just a different way of doing things.

Standard Operating Procedures for the finance department have always been in place and are updated every single year. This is part of what the financial audit helps the district develop.

The first year with Wilcox Arredondo, they recommended that the district change several practices and procedures that Pauly Rogers had approved and recommended for the district. We should fully expect that Pauly Rogers will have findings that recommend changing them back. Just like it wasn’t “wrong” when Wilcox Arredondo asked for a change, it isn’t “wrong” when Pauly Rogers asks for a change back.

Fourth, when people talk about discrepancies in fund balances, make sure they are making apples-to-apples comparisons. Throughout the school year, the previous Director of Finance would give detailed reports to the Board that included estimates of ending fund balances as well as internally “set aside” funds. Some of these internal set asides were safety nets for what needed to be refunded to the State School Fund, or future PERS increases, or other internal designations; some were to meet requirements from Board Policy DBDB (passed in 2018 when the district was in dire financial straits prior to hiring Dr. Morelock). 

The only amounts that are apples-to-apples comparisons are final audited ending fund balances, not financial statements and estimates made during the school year.

Fifth, the previous Director of Finance regularly reminded the Board that the district would owe money back to the State School Fund because of drops in enrollment. All enrollment figures and estimates for financial impact were constantly tracked and adjusted and planned for. There was no misreporting of enrollment; in fact, there have been plans in place since Fall of 2021 for money due back to the State School Fund. Any money owed to the State School Fund in May of 2023 is not a surprise, nor is it due to misreporting of enrollment.

For reference, see this statement from December 1, 2021. Scroll down to “How does the decline in enrollment affect the financial situation of the district?” and to “Bottom Line,” particularly this sentence: “…that number itself is an estimate, and will change until May of 2022 because of how the State does accounting.”

Sixth, questions should be asked if the ending fund balance for 2021-2022 is lower than the $7,200,000 planned for in the approved budget for 2022-2023. You can find this number in the approved budget on page 19, where “Beginning Fund Balance” for 2022-23 is the estimated “Ending Fund Balance” for 2021-2022.

• While Dr. Morelock was fired in November of 2021 and was paid for the rest of the year, the district only had to “double pay” for Superintendent for a month and a half after Dr. Phillips was hired in May of 2022. Interim Superintendent Dr. Novotney did not take a salary from the district. 
• The following positions were budgeted for the entire year, but only had to paid for a partial year when the people in the positions resigned and were not rehired: Assistant Superintendent (vacant for 6 months); Director of Informational Technology (vacant for 5 months); Assistant Principal at Edwards Elementary (vacant for 7 months). That is hundreds of thousands of dollars budgeted but not spent, savings which should have increased the ending fund balance over the expected $7,200,000.
• Legal fees were estimated to be a significant issue; see this Board Packet from Feb. 22, 2022, pg. 20.