I. Understatement of CEE by allowing too many exclusions. The State Auditor recommendation was clear: "Seek an amendment to existing regulations to discontinue the practice of excluding from the compliance calculation noninstructional activities not enumerated in the law, or seek an opinion from the attorney general to support the interpretation of the law as reflected in the regulations." The Chancellor refused to comply with the auditor’s recommendation in his task force report.

Here is the problem: the law says EVERYTHING is in CEE (the denominator of the calculation) except certain items that are specifically excluded. The Chancellor’s office allows MORE Exclusions than allowed in the law, primarily by increasing what may be called "Ancillary Services." The Budget and Accounting manual has been changed to code these items for accounting purposes so they never show up in the calculation. [Note: the changes are initiated by the Chief Business Officers and the Fiscal Standards and Accountability Committee, and are rubber-stamped by the Board of Governors without meaningful review or the opportunity for formal Board input by interested faculty; worse, the Budget and Accounting Manual automatically becomes part of the Regulations, without additional legal scrutiny, per a Regulation change prior to the 1993 BAM revision].

The Chancellor claims that all such changes have undergone a review by the Office of Administrative Law, but any such review of the language would be meaningless–without a simultaneous review of how the law has been implemented–because an intentionally misleading statement appears in the Budget and Accounting Manual. That statement is: "This activity is used to record all expenditures for the operation of ancillary services (generally defined as self-sufficient entities providing services to students, faculty, and staff)." (BAM, chapter 4, 6900 Ancillary Activities, emphasis mine). The phrase "self-sufficient entities" would reassure any reviewer that general funds would not be expended for these activities, and therefore, there would be NO reduction in CEE due to this coding. This would be because no expenditures would be made from CEE, since they would be covered by the revenue stream of the ancillary activity.

Nevertheless, the Chancellor and Business Officers readily acknowledge that they have no expectation that several of the so-called ancillary activities will EVER be self-sufficient–e.g. Child Development Centers, Parking, Student and Co-curricular activities such as student newspapers, intramural athletics or intercollegiate athletics. Therefore, these deficit expenditures always reduce CEE, subverting the limitations on CEE exclusions that appear in EC 84362. Moreover, ANY money-losing business activity that was set up with the seeming intent to provide services to students, faculty or staff could be a drain on the General Fund under this provision, without any legal limitation. And every dollar spent would reduce the CEE pie, and further reduce the amount required to be spent on instruction.

In fact, as of October 12, 2000, and reaffirmed in November, 2000, the Chancellor, with the concurrence of the task force, proposed that "the general fund expenditures used to make up the difference between revenue and expenses for ancillary services be included in CEE." This would have had the effect of disallowing exclusions from CEE to cover ancillary losses, making the "self-sufficient" statement more honest, and satisfying the State Auditors’ objection in substance without requiring the additional changes to regulations in form. The Chancellor abandoned this position in his final report, even though it would have resulted in assuring the Legislature and taxpayers that general fund money would not be used to cover non-instructional business venture losses instead of instruction. Obviously, this still needs attention.

II. Failure to clarify the definition of new vs. replacement equipment. (State Auditor) Both the IRS and the Financial Accounting Standards Board (FASB) have definitions of new vs. replacement equipment. If the Districts are following Generally Accepted Accounting Principles, they should use FASB standards. It is the clear intention of the original legislation to include replacement of equipment as part of a normal and usual expense of education–and to only exclude items that represented an expansion of facilities. The new BAM rules serve only to drain instructional money into the redecoration of administrative offices, at the expense of instruction.

III. No plan to address instances when it finds that CPA audit work is substandard. (State Auditor) The Chancellor’s office never responded to a detailed report with documentation of the errors made by SMC auditors in 97-98, and did not even make this State Auditor recommendation an agenda item for Task Force discussion. Because a system exists to investigate and reprimand CPAs (State Board of Accountancy), it would be easy for the Chancellor’s office to implement this recommendation.

IV. (item missed by the State Auditors) District miscoding of items that represent campus operations or Community Relations (included in CEE) and instead recording items as though they were Community Services (excluded from CEE). This was an example of an issue which our District had presented to the Chancellor’s office and the task force, but was not even considered because it had not been included in the auditor’s report. The problem is increasingly widespread, as Districts code administrators and classified who previously had been part of CEE and now are coded as Community Services because they supervise facilities which are sometimes used by the public (Board room, parking lots, athletic fields). This miscoding can result in several hundred thousand dollars of exclusions from CEE and a reduction in District spending on instruction.

V. Exclusion of Lottery funds from CEE. (missed by State Auditors) Because the Lottery language is in the Government Code rather than the Education code, the Chancellor’s office feels that funds from the lottery–even if they are NOT expended, but end up in increasing the ending balance–be excluded from CEE, and not spent at least 50% on instruction. Because many districts spend this on utilities (as reported in CCFS-311) and it is supposed to be spent 100% on instruction (per Gov Code), who is supposed to do the oversight on this if not the Chancellor’s office and the District auditors?

Changes to the Contracted District Audit Manual

A 50% law TECHNICAL Task force met once this summer to discuss the changes to the Contracted District Audit Manual that had been made and approved within the Chancellor’s office and disseminated to District auditors prior to Consultation Review. While the Task Force made some changes to the document, and the audit steps are an improvement over the prior version of the audit recommendations, the section that supposedly highlights observed problems in implementation of the law is misleading and unclear.

Additional changes need to be made to this document and the process by which changes to this document are made:

   1. Process changes need to be made in the development of the audit recommendations. Faculty, students, and taxpayer advocates who are CPAs and trained auditors need to have primary input into audit recommendations. As it stands now, administrators and Business Officers are controlling the input for audit changes, when they have the responsibility for initial input of accounting information and oversight of that information. An independent audit is supposed to provide assurance that the Districts and the Chancellor’s office are doing an adequate job of assuring that expenditures are correct. A "fox guarding the henhouse" situation exists if those being reviewed, with an established belief that the 50% law is "archaic" and "no longer needed," are allowed to control what is to be reviewed. The Bureau of State Auditors could be called upon for input, but the Chancellor’s office should have only minor involvement into how any such review should take place.
   2. The descriptive material preceding the audit steps should be rewritten to clearly describe the error that managers have made in the past, and not grouped to mislead a reader regarding the direction of the error observed. For example, as currently written, the material states: "Particular areas in which questions of compliance have arisen are Inclusion in ‘Salaries of Classroom instructors’ (SCI) of instructional aides salary and benefits." This is misleading, because instructional aides salaries are properly included in SCI; the problem occurs only if classified employees who are NOT instructional aides are mistakenly included. Every listed item is confusing in this or some other way, so the whole section must be restructured and redone to clarify current problems rather than obscure them.
   3. Remove audit items that test to ensure that CEE is as low as possible, as any error that failed to exclude an item from the calculation would NOT result in the violation of the law (underspending on instruction). Such testing is a waste of taxpayer money, as managers have an interest in excluding as much as possible, and the "audit risk" only exists that they will exclude too much, so testing should be limited to those items.