We performed this audit pursuant to the State Comptroller’s authority set forth in N.J.S.A. 52:15C-1 to -24. We conducted this audit in accordance with Generally Accepted Government Auditing Standards (GAGAS)^[1]applicable to performance audits. Those standards require that we plan and perform the audit to obtain sufficient, appropriate evidence to provide a reasonable basis for our findings and conclusions based on our audit objectives. We believe that the evidence obtained provides a reasonable basis for our findings and conclusions based on our audit objectives.

The Hunterdon Central Regional High School District (District) is located in Hunterdon County and serves five municipalities: Delaware Township, East Amwell Township, Flemington Borough, Raritan Township, and Readington Township. During fiscal year (FY) 2022, the District had an enrollment of 2,575 students in grades 9 through 12 and approximately 225 teachers. Approximately $91 million in local property taxes made up 65.1 percent of total revenues for the District. Federal, state, and local grants accounted for approximately 32.5 percent of revenue. Total budgetary revenue for the District’s general fund, including state, federal, and local sources, was approximately $76 million.

The District is governed by a Board of Education (Board) comprised of nine elected volunteers from the five sending districts. The Board members serve three-year terms. The primary function of the Board is to establish policies for the District. The Board delegates the administration of the District to the Superintendent.

The Board entered into collective bargaining agreements (CBAs) with the Hunterdon Central Regional High School Administrators Association (Administrators Association), the Hunterdon Central Regional High School Education Association (Education Association), and the Hunterdon Central Bus Drivers Association/NJEA/NEA (Bus Drivers Association). The Board entered into individual employment contracts with employees not subject to collective bargaining.

Our audit identified weaknesses with certain fiscal and operating practices related to employee benefits. We found that the District lacked adequate policies, procedures, and controls governing the functions of procurement, personnel, and payroll.

Specifically, our audit found that the District:

• Failed to procure health insurance coverage and health insurance brokerage services (brokerage services) in accordance with the Public School Contracts Law (PSCL);
• Could have saved up to approximately $2.3 million in FY 2023 by obtaining health benefits coverage from the School Employees’ Health Benefits Program (SEHBP);
• Paid $100,000 for health benefit waiver payments to eight employees who also received health insurance coverage paid for by the District through a family member employed with the District;
• Failed to adhere to its CBAs or policies in processing and approving employees’ leave of absence requests; and
• Issued improper payments to employees at separation of employment due to weaknesses in internal controls.

The District must take appropriate action to strengthen its internal controls by improving its current practices, revising policies and procedures, and increasing management oversight in order to achieve greater operational effectiveness and to comply with applicable laws and its own internal policies and procedures.

We make nine recommendations to improve District operations and its compliance with applicable statutes and regulations.

The objectives of our performance audit were to review the District’s controls over selected employee benefits; assess its compliance with laws, regulations, and internal policies and procedures related to those practices; and identify opportunities for cost savings.

The period July 1, 2019 through June 30, 2023.

To accomplish our objectives, we reviewed relevant statutes, regulations, District policies and procedures, CBAs, individual employment contracts, financial records, Board meeting minutes, and other supporting records. We also interviewed certain personnel to understand their job responsibilities, overall operations, and the District’s internal controls.

GAGAS requires auditors to plan and perform audit procedures to assess internal control when internal control is determined to be significant to the objective. The Government Accountability Office’s Standards for Internal Control in the Federal Government, or “Green Book,”^[2] provides a framework for internal control systems for public entities. The Green Book establishes five components of an internal control system: control environment, risk assessment, control activities, information and communication, and monitoring. The five components include 17 principles that support effective design, implementation, and operation of an internal control system. GAGAS requires written communication of deficiencies in internal control that warrant the attention of those charged with governance. Deficiencies significant to our audit objectives are included in this report. We communicate internal control deficiencies that are not significant to our audit objectives through separate correspondence to those charged with governance.

As part of our review, we selected a judgmental sample of records. Our samples were designed to provide conclusions about the validity of the sampled transactions and the adequacy of internal controls and compliance with applicable laws, regulations, policies, and procedures. Because we used a non-statistical sampling approach, the results of our testing cannot be projected over the entire population of like transactions or contracts.

Insurance Contracts Procurement

Objectives

To determine whether the procurement of health insurance coverage and brokerage services complied with applicable statutes and regulations.

To determine whether the District could have saved money by participating in the SEHBP.

Findings

The District’s procurement of health insurance coverage and brokerage services did not comply with the PSCL requirements or the District’s own policy.

The District failed to obtain required vendor disclosure forms from its health insurance broker (broker) and dental insurance vendor as required by law.

The District could have saved up to approximately $2.3 million in FY 2023 by joining the SEHBP.

Criteria

Pursuant to N.J.S.A.18A:18A-5a(10), insurance, including the purchase of insurance coverage and consultant services, may be procured without formal bidding procedures, provided that the school district complies with the statutory and regulatory requirements for awarding a contract using the “extraordinary unspecifiable services” (EUS) procurement method. An EUS is a service that is specialized and qualitative in nature. The service provider must have expertise, extensive training, and a proven reputation in the relevant field. The District may award an EUS contract in excess of the bid threshold^[3] by documenting efforts to secure competitive quotations and having an official file a certificate with the governing body describing the nature of the contract and the informal solicitation of quotes.  

Specifically, a school district must obtain at least two competitive quotations and document that effort. In addition, a designated school official, such as a business administrator, must request that a district’s Board award the contract for brokerage services as an EUS by certifying to the Board that the contract meets the EUS exception to formal bidding and describing the informal solicitation of quotes. In the resolution awarding the contract, the school district must identify the reasons for utilizing the EUS contracting process. Finally, the school district must publish a notice of the contract award in its official newspaper, including details such as “the nature, duration, service, and amount of the contract.” N.J.S.A. 18A:18A-5(a)(1).

The District must obtain compliance forms, including a Business Registration Certificate, Ownership Disclosure form, Affirmative Action/Equal Employment Opportunity Certificate, and Disclosure of Investment Activities in Iran form from each vendor awarded a contract for insurance or brokerage services.

In addition to the PSCL, the District must comply with N.J.A.C. 6A:23A-6.3(a)(4), which requires the disclosure of political contributions no less than 10 days prior to entering into a contract in excess of $17,500.^[4]

N.J.S.A. 17:22A-41.1(a) requires a licensed insurance producer who sells, solicits, or negotiates health insurance policies or contracts to notify the purchaser, in writing, of the amount of any commission, service fee, brokerage, or other valuable consideration that the producer will receive. If the commission, service fee, brokerage, or other valuable consideration is based on a percentage of premium, the insurance producer shall include that information in the notification to the purchaser.

Collective bargaining between the District and its employees determines the nature of employee benefits. The level of health benefits is mandatorily negotiable, except when preempted by statutory requirements, and may not be changed unilaterally. District CBAs require that health insurance plans provide coverage equal to or greater than the current benefit level of coverage. The District may change health benefit providers if this standard is met.

Methodology

• Interviewed personnel responsible for procurement;
• Reviewed District policies for purchasing;
• Examined applicable provisions of the PSCL and J.A.C. 6A:23A-6.3;
• Reviewed broker’s market analyses;
• Reviewed CBAs’ terms addressing health benefit coverage;
• Reviewed supporting documentation; and
• Compared the District’s medical and prescription insurance premiums with premiums for comparable coverage offered by the SEHBP.

Audit Results

The District uses a broker to obtain its employee medical, prescription, and dental insurance coverage. The annual value of each of the three insurance contracts, as well as the agreement with the broker, exceeded the bid threshold during the period FYs 2020 through 2022. The total value of these contracts was approximately $13.61 million in FY 2020, $13.08 million in FY 2021, and $12.95 million in FY 2022. We judgmentally selected 6 of 15 health insurance and brokerage services contracts for review. We reviewed all dental and brokerage service contracts for the period FYs 2020 through 2022. We found that the District did not complete the required procedures before awarding the contracts under the EUS exception.

Specifically, the District (1) did not provide evidence that it attempted to obtain any quotations for three brokerage service contracts reviewed; (2) did not file a certificate with the governing body describing the nature of the work to be done, describing the informal solicitation of quotations, and describing in detail why the contract complies with the requirements of the EUS statute and applicable rules for any of the six contracts reviewed; and (3) did not provide proof that it advertised the contract award in an official newspaper for any of the six contracts reviewed. Additionally, the District indicated that it did not have a written contract detailing the scope and cost of the brokerage services. However, we were able to determine that the broker provided the terms of its compensation in writing to the District.

We requested that the District and its broker provide documentation of the total compensation amount paid to the broker for the period July 1, 2020 through June 30, 2022. We were not provided with this documentation by the District or the broker. We were able to obtain documentation through the joint insurance fund (JIF)^[5] and found that compensation paid to the broker was approximately $253,000 for FY 2022. The District violated the PSCL by failing to obtain quotes for brokerage services. This fundamental failure to obtain competition reduced the likelihood that the District obtained the best price for services. The lack of a written contract, formally approved by the Board and specifying the scope of the broker’s duties and the terms on which the broker will be compensated, resulted in less transparency to the public than required by law.

We have noted in prior reports that brokers face a conflict of interest related to their own financial incentive to recommend coverage options that provide greater compensation to themselves over cheaper options that provide lesser compensation or prohibit broker commissions, as is the case for the State Health Benefits Plan (SHBP) and SEHBP. The District can mitigate the effect of these conflicts of interest by obtaining competition for brokerage services seeking proposals for a flat fee or fixed rate contract with a not-to-exceed contract amount. The flat fee rate should be the only compensation provided to the broker by the District or insurance provider.

The District did not obtain required bidder disclosures including disclosure of bidder’s owners, political contributions, and whether the bidder is involved in prohibited investment activities in Iran. Additionally, the District did not obtain the broker’s business registration certificate or its certificate of employee information report evidencing compliance with the State’s equal employment opportunity laws, both of which are required of contractors doing business with a government entity in New Jersey. We received compliance documentation for the broker dated December 2022. The compliance documentation provided had execution dates after the appointment resolutions, which means it was not received prior to the award of the contract.  

The District’s resolutions appointing the broker as the health benefits agent and the health insurance carriers for each of the school years in our scope did not follow the EUS requirements. The resolutions did not state the supporting reason(s) for the Board’s actions. Certificates required by N.J.A.C. 5:34-2.3 were not filed by a designated official with the governing body. On June 26, 2023, the Board approved a resolution appointing the health benefit advisor for FY 2024 that stated the supporting reason for the Board’s actions and acknowledged the receipt of the standard certification declaration for an EUS. These acts demonstrate that the District took some actions to improve its procurement process.

Finally, our audit determined that the District was required to obtain political contribution disclosure forms for each vendor. We were provided with political contribution disclosure forms for the District’s broker. Because the date of the FY 2020 form was after the award of the contract and the FY 2021 form did not include a date, we could not verify the timely receipt of the forms. The District did not provide copies of the required political contribution disclosure forms for its dental insurance vendor for our review.

The District’s noncompliance with procurement requirements diminishes its ability to avoid awarding contracts to ineligible vendors, obtain meaningful price competition, and monitor its agreements to prevent fraud, waste, and abuse.

Potential Savings Analysis

On January 1, 2021, the District started providing health insurance coverage for its employees through a JIF. A JIF provides medical, dental, prescription, and vision coverage to its members on a self-insured basis and secures reinsurance in a form and an amount overseen by the Commissioner of the state Department of Banking and Insurance.

We compared the premiums of the District’s medical and prescription insurance coverage with the rates for comparable coverage offered by the SEHBP during FY 2023. We selected the December 2022 invoice for the District's medical and prescription coverage as the basis for our estimate. We projected the total cost for December 2022 over 12 months to obtain an estimate of the annual cost. Using the enrollment data from the December 2022 medical and prescription invoice, we projected the annual cost of coverage for FY 2023 using the comparable SEHBP rates. Our analysis of FY 2023 enrollment and rates determined that the District and its employees could have saved approximately $2.3 million by obtaining coverage through the SEHBP.

The District would be required to negotiate any change in insurance carrier if the level of benefits was determined not to be equal to or better than its current benefits. Through collective bargaining, the District may need to provide additional employment benefits to employees in order to achieve the desired change in insurance benefits. The potential savings calculated above does not include the estimated costs of these benefits. The costs associated with those additional benefits could mitigate the potential savings that would accrue to the District.  

The District expressed that negotiations with collective bargaining units for health benefit coverage are complex and as a result, it is difficult to make changes in insurance carriers. The District informed us that the collective bargaining units are aware of every benefit available and the loss of a potential benefit may prevent the collective bargaining units from agreeing to change providers.

The District's broker explained his view of why the District has not switched to the SEHBP. The broker outlined that the SEHBP has revised downward certain coverage items, thereby making the SEHBP, in the broker’s opinion, not equal to or better than the existing benefits. Examples of these downward coverage revisions include imposing on out-of-network pain management providers fixed dollar reimbursement caps for physical therapy, chiropractic, and occupational therapy, the SEHBP’s decision to eliminate coverage of out-of-network lab services, and the SEHBP’s change of the database they rely on for determining reasonable and customary payments to out-of-network providers.

Additionally, our review of SEHBP plans indicated that only one SEHBP plan uses the same network of healthcare service providers as the District’s current insurance carriers. A difference in available service providers can be a barrier to providing alternate coverage that is equal to or better than existing coverage options.

Despite these challenges, the District should seek to negotiate insurance coverage to obtain the best coverage at the best price. We note that prior to joining the JIF, the District’s broker provided rate quotes from multiple medical and prescription insurance carriers in its FY 2021 insurance renewal report. However, the insurance renewal reports for FYs 2022 and 2023 failed to include an analysis of competitive coverages available to the District for group medical and prescription coverage. Since FY 2022, the reports present a comparison of the current year rates and renewal rates from the District’s existing service provider of group medical and prescription. The lack of competitive rate quotes from alternate providers reduces transparency and prevents the District from holding its current vendors accountable on price.

During this same period, the fee paid to the District’s broker increased from $50.49 per employee per month in FY 2021 to $54.07 in FY 2023 without any evidence of a competitive procurement process as noted above. This represents an estimated increase in annual fees between FYs 2021 and 2023 of approximately $17,000 for the District’s roughly 390 employees. We requested information regarding the extent and nature of the services provided by the District’s broker. The broker referred to a boilerplate section of the broker’s annual renewal report listing a number of services including competitive quoting. The renewal reports provided by the broker to the District for FYs 2022 and 2023 failed to include details of competitive quotes for medical and prescription coverage. We requested additional information from the District to supplement the broker’s responses regarding services provided. Our request for monthly data such as key performance indicators or call logs went unanswered by the District. The limited transparency into the work of the broker creates cause for concern that the District did not receive fair value in exchange for the more than $250,000 it compensated the broker in FY 2022 to essentially recommend a non-competitive renewal and assist with claims. The absence of a competitive procurement process, the lack of written agreement or transparent performance data, and the inherent conflict of interest for brokers mentioned above created an environment vulnerable to waste and abuse.

Cause

The District failed to follow many requirements of the PSCL and N.J.A.C. 6A:23A-6.3 in its procurement of dental insurance coverage and brokerage services.

Effect/Potential Effect

The District’s failure to follow the PSCL and N.J.A.C. 6A:23A-6.3 for the procurement of dental insurance coverage and brokerage services resulted in a lack of adequate competition among vendors and decreased transparency in costs for services. As a result, the District may not have obtained the best price for dental insurance coverage and brokerage services. By receiving up-to-date and accurate data about the pricing of benefit options, both the District and its employees could potentially receive greater savings through negotiation.

Recommendations

1. Comply with the requirements of the PSCL and N.J.A.C. 5:34-2 for the procurement of health insurance coverage and brokerage services.
2. Obtain political contribution disclosures for health insurance coverage and brokerage service contracts in accordance with N.J.A.C. 6A:23A-6.3.
3. Seek to mitigate insurance broker conflicts of interest by establishing a flat fee or fixed rate contract with a not-to-exceed contract amount. The flat fee rate should be the only compensation provided to the broker by the District or insurance provider. The brokerage service contract should detail all terms and conditions including compensation.
4. Conduct an analysis to evaluate the costs and benefits of switching from the existing JIF to the SEHBP for medical and prescription coverage for current employees.
5. Seek to implement the most cost-effective means of providing employee health benefits through collective bargaining. Substantiate any analysis performed and collective bargaining negotiations with written documentation.

Health Benefit Waivers

Objective

To determine whether the District’s health benefit waiver payments are fiscally prudent.

Finding

The District paid $100,000 in health benefit waiver payments to eight employees who received health benefits coverage through a family member also employed by the District from FYs 2020 through 2022.

Criteria

Payments to an employee to incentivize the waiver of health benefits are statutorily limited to the lesser of $5,000 or 25 percent of the amount saved for many local government entities. The Division of Local Government Services has provided guidance to local governments, excluding school districts, recommending that the governing body of each local unit authorizing payments in lieu of health benefits annually review, and have a thorough discussion about, their policy, its impact on the local unit’s budget, and whether such waiver payments remain fiscally prudent. N.J.S.A. 40A:10-17 excludes these waiver payments from the collective bargaining process for local governments. These local governments may determine the most fiscally prudent manner of offering waiver payments without negotiation. N.J.S.A. 52:14-17.31a excludes these payments from the collective bargaining process for entities enrolled in the SHBP or SEHBP. Health insurance benefits are mandatorily negotiable unless preempted by a statute or regulation. District CBAs provide for a payment of up to $5,300 to employees waiving health benefits coverage. The payment amount varies based on the level of coverage waived.

In order to avoid the duplication of benefits, the SHBP and SEHBP do not allow waiver payments to employees receiving SHBP or SEHBP coverage through a family member. District CBAs do not contain a similar limitation.

Methodology

• Interviewed personnel responsible for health benefit waiver administration;
• Examined District CBAs;
• Reviewed laws related to health benefit waiver payments; and
• Compared health benefit enrollment and waiver payments to identify duplicated benefits.

Audit Results

The District paid approximately $1.3 million in health benefit waivers to an annual average of 112 employees between FYs 2020 and 2022. The District informed us that it made waiver payments to employees who also received health benefits coverage through a family member employed by the District. District CBAs do not prohibit employees from “double dipping” by receiving waiver payments while simultaneously receiving health benefits from the District through a family member. The District provided a list of seven employees who received duplicate benefits valued at $99,000 for FYs 2020 through 2022. Our review confirmed that the seven employees on the District-prepared list received duplicate benefits and we identified one additional employee who received $1,000 in waiver payments while receiving District-paid health benefit coverage during FYs 2020 through 2022.

Cause

State law, District CBAs, and individual employment contracts do not prohibit payments for health benefit waivers to those receiving District-paid health benefits.

Effect/Potential Effect

The District made wasteful payments for health benefit waivers of $100,000 to employees receiving District-provided health insurance through a family member. The wasteful payments will continue until there is a negotiated change in CBAs or a change in state law.

Recommendation

6. Seek to eliminate waiver payments to employees receiving District-provided health insurance through a family member via contract negotiations. Maintain supporting documentation for such efforts.

Leaves of Absence

Objective

To determine whether the District processed leave of absence requests in compliance with District policies, CBAs, and individual employment contracts.

Finding

The District did not have written procedures for processing requests and approvals of temporary and extended leaves of absence consistent with CBAs, individual employment contracts, and existing policies.

Criteria

The District provides employees with temporary and extended leave benefits. These benefits may be paid or unpaid. District policies, CBAs, and individual employment contracts establish the guidelines for use of these benefits. Temporary leaves of absence include jury duty and personal and bereavement leave. Employees are eligible for extended paid and unpaid leave for maternity, child rearing, physical or mental disability, and military service. Temporary and extended leave benefits are subject to approval and documentation requirements that vary by the type of leave utilized.

During FY 2021, the District entered into an agreement with the Education Association to permit remote work due to the COVID-19 pandemic. The agreement established guidelines for permitting remote work and required that members who worked remotely contribute an amount to offset the cost of substitute coverage. The agreement required a contribution of $35 per day for certified staff and $15 per day for paraprofessionals.

Methodology

• Interviewed personnel responsible for leave of absence administration;
• Examined District policies, CBAs, and individual employment contracts;
• Selected a judgmental sample of employees using more than 50 days of temporary and extended leaves of absence in one year; and
• Reviewed temporary and extended leave of absence documentation for compliance with District policies, CBAs, and individual employment contracts.

Audit Results

We identified 116 instances involving 100 employees who used more than 50 days of leave annually between FYs 2020 and 2022. We selected a judgmental sample of 28 instances representing 20 employees. We found instances in which required medical documentation did not cover every leave day used, leave days that lacked documentation of approval, and leave days that were not categorized accurately. In FY 2021, the District tracked employees working remotely by coding those days with the leave reporting category “other.” This coding to track remote work is in connection with the agreement between the District and the Education Association to permit remote work due to the COVID-19 pandemic. The agreement required that members who worked remotely contribute an amount to offset the cost of substitute coverage. Our review of employees using remote workdays identified $1,138 that was not contributed by three employees.

Management should design control activities to achieve objectives and respond to risks.^[6] The District does not have written procedures related to the processing of leave requests, obtaining and documenting required approvals, and maintaining documentation to ensure the consistent application of District leave policies.

Cause

The District did not implement written procedures to ensure compliance with its policies, CBAs, and individual employment contracts regarding the processing and approval of leave of absence requests.

Effect/Potential Effect

The lack of written procedures may lead to noncompliance with District policies, CBAs, and individual employment contracts.

Recommendation

7. Develop written procedures for processing requests and approvals of temporary and extended leaves of absence consistent with CBAs, individual employment contracts, and existing policies.

Accumulated Leave Payments

Objective

To determine whether the District processed leave payments in compliance with applicable state law, District policies and procedures, CBAs, and individual employment contracts.

Finding

The District failed to make leave payments at separation in accordance with CBAs and individual employment contracts resulting in approximately $31,000 in excess payments and approximately $7,000 in underpayments.

Criteria

In 2007 and 2010, in an effort to reduce property taxes, the Legislature enacted laws that place limits on payments for unused sick leave. The 2007 and 2010 sick leave laws place restrictions on the timing and amount of payments to certain employees. The 2007 law, N.J.S.A. 18A:30-3.5, limits payments for unused sick leave to Superintendents, Assistant Superintendents, and Business Administrators to the greater of $15,000 or the amount accumulated on the effective date of the law or upon appointment to the position. The 2010 law, N.J.S.A. 18A:30-3.6, limits payments for unused sick leave for employees hired after May 21, 2010 to no more than $15,000. The 2007 and 2010 laws both authorize payments for unused sick leave only upon retirement.

The Board has CBAs with the Administrators Association, Education Association, and Bus Drivers Association. Employees not subject to CBAs have individual employment contracts.

The Administrators Association CBA and the individual employment contracts reviewed contain provisions limiting payment of sick leave for employees hired after May 21, 2010 to $15,000 and only upon retirement. However, the Education Association and the Bus Drivers Association CBAs did not contain these provisions. Under their CBAs, an employee hired after May 21, 2010 could be eligible for a payment for unused sick leave that exceeds statutory limits.

The Administrators Association CBA and the individual employment contracts reviewed contain provisions limiting vacation payments for employees at separation to a maximum of one-year’s vacation allotment. The Education Association CBA limits the vacation payments to the one-year’s vacation allotment plus a maximum of five unused vacation days carried over from the previous year. The Bus Drivers Association CBA does not address unused vacation payments because covered employees are not provided vacation leave.

Methodology

• Interviewed personnel responsible for leave payment administration;
• Examined CBAs, individual employment contracts, and relevant state laws regarding employee leave payments;
• Analyzed accumulated leave time and payroll reports;
• Selected a judgmental sample of employees receiving payments at separation of employment; and
• Reviewed documentation of payments at separation of employment for compliance with applicable state law, District policies, CBAs, and individual employment contracts.

Audit Results

Between FYs 2020 and 2022, the District paid approximately $1.1 million in leave payments to 60 employees at their separation of employment. We judgmentally selected leave payments for 20 employees to determine whether the payments complied with applicable state law, District policies and procedures, CBAs, and individual employment contracts.

The District utilizes multiple templates to calculate leave payments according to an employee’s position. We found that templates used to calculate the leave payments for 8 of 20 employees tested were not properly designed. Specifically, we noted templates that contained a formula error that incorrectly limited the payments of sick leave and templates that failed to limit the payment of unused vacation leave as required by District CBAs and individual employment contracts.

We found that leave payments for 12 of the 20 employees were inaccurate, resulting in approximately $31,000 in excess payments and $7,000 in underpayments. Of note, the District overpaid two employees by $23,916 because the templates did not cap the payment of unused sick leave in accordance with the Administrators Association CBA.

The District overpaid three employees approximately $5,000 for vacation leave in excess of the one-year’s vacation allotment. In addition, the District failed to compensate two employees approximately $4,000 for unused personal leave. The District also failed to compensate an employee approximately $2,000 for unused sick leave.

Management should design control activities to achieve objectives and respond to risks.^[7] Accordingly, templates must be consistent with applicable state law, District policies, CBAs, and individual employment contracts to be effective.

Cause

Weaknesses in the design of District internal controls and payment templates led to noncompliance with CBAs and individual employment contracts and the calculation of inaccurate leave payments.

Effect/Potential Effect

The District made leave payments to employees that were inconsistent with the applicable state law, CBAs, and individual employment contracts. If not corrected, the use of District payment templates will result in additional inaccurate and wasteful leave payments to employees.

Recommendations

8. Review the design of the templates used to calculate employee leave. Ensure that the formulas are accurate and that the templates include limitations to the payment of unused sick and vacation leave according to applicable state law, CBAs, and individual employment contracts.
9. Recover the excess leave payments made. Issue leave payments owed to underpaid employees.

We provided a draft copy of this report to District officials for their review and comment. The District disagreed with our audit findings and conclusions regarding payments to employees at separation of employment, insurance and insurance services procurement, and health benefit waivers. The District stated that it did not receive back-up information for several of the findings. We note that information was provided throughout the audit and that we provided additional details related to our report findings as part of our review of the District’s response.

The District disagreed with our calculation of leave payments to employees at separation. The disagreement is due to different interpretations of contract provisions when calculating the payments to employees. The District also argued that the methodology for calculating payments was consistent with past practices. We contend that the District should follow contract provisions limiting compensation for accrued sick and vacation leave when calculating employee payments at separation. These provisions are included in the employee contracts to safeguard taxpayers against legal but potentially excessive payments to employees at retirement.

We disagree with the District’s position that the costs of the broker are at no cost to the District because the broker receives payments from the insurer. The premiums charged to member districts of the JIF must cover the cost of claims and related administrative charges, including broker commissions to prevent insolvency of the JIF. The procurement regulations for insurance and insurance services require the solicitation of multiple quotes to encourage competition. The additional data obtained through a competitive procurement process can assist the District when seeking changes to benefits. 

The District argues that payments to employees who receive District-paid health insurance through a family member employed by the District saves money by providing an incentive for the eight employees to waive their health coverage. This argument is inconsistent with the guidance provided for local government units in Local Finance Notice (LFN) 2016-10. While not authoritative, LFN 2016-10 maintains that increased employee contributions toward health benefits coverage provide sufficient incentive to waive coverage without additional payments. The contributions toward health benefit coverage required of school district employees should provide similar incentives to waive health benefits without payment. Our report and recommendation acknowledge the difficulties that Districts may encounter when seeking change to employee benefits through negotiations. We urge the District to seek recommended changes through negotiations.

The District’s comments were considered in preparing our final report. Accordingly, we removed language that requested insurance broker commissions be returned to the District or credited to the premium costs and made changes to our calculation of leave payments at separation. In many instances, the District indicated that there was a lack of legal authority for our findings and/or recommendations. Many of our recommendations exceed the minimum required by law in order to improve transparency and accountability at the local level. We reiterate that this is a performance audit which provides objective analysis, findings, and conclusions to assist management and those charged with governance and oversight with, among other things, improving program performance and operations, reducing costs, facilitating decision making by parties responsible for overseeing or initiating corrective action, and contributing to public accountability. Our findings and recommendations are in accordance with performance audit standards. The District’s response is attached as Appendix A.

We are required by statute to monitor the implementation of our recommendations. In accordance with N.J.A.C. 17:44-2.8(a), within 90 days following the distribution of the final audit report, the District is required to provide a plan detailing the corrective action taken or underway to implement the recommendations contained in the report and, if not implemented, the reason therefore. We will review the corrective action plan to evaluate whether the steps taken by the District effectively implement our recommendations.

We thank the management and staff of the District for the courtesies and cooperation extended to our auditors during this engagement.