FINANCIAL MANAGEMENT REVIEW

MERCER COUNTY SCHOOL DISTRICT

CONTENTS

	PAGE
TRANSMITTAL LETTER	3
REQUEST	5
BACKGROUND	5
FINDINGS	5
SUMMARY	6
RECOMMENDATIONS	7
KDE CONTACTS	7
EXHIBITS	8

August 1, 2008

Bruce Johnson, Superintendent

Mercer County School District

371 E. Lexington St.

Harrodsburg, KY 40330

Dear Superintendent Johnson:

Enclosed you will find the financial review report conducted by the Kentucky Department of Education as requested by your letter of May 13, 2008.

This report summarizes the review and analysis of specific financial records, in addition to the results of observations that took place and information that was collected while in the school district on June 24, 2008. Our staff members interviewed the concerned citizens, parents, board members, local and state officials and staff of Mercer County who wanted to express their views about the financial condition of the Mercer County School District.

The specific areas that were reviewed were payroll-personnel expenses and district operations prior to and after the Harrodsburg Independent – Mercer County merger. Information gathered in these areas provided the opportunity to analyze the financial stability of the district as well as the capacity of the board to ensure continued student achievement.

A review of the Merger Agreement revealed a strong commitment by both boards of education to maintain salaries, staffing, and programs at the highest levels that existed at the time of merger. However, the agreement did anticipate potential challenges from that commitment by stating that ultimate decisions regarding those issues would be made by the superintendent of the merged district. Certainly, at the time that agreement was being drafted, it would have been difficult to project the impact of a substantial mandated salary increase that many school district leaders throughout the state consider to be under-funded by the legislature. Since the time the agreement was drafted, school districts across the state have also experienced significant increased costs for food services and oil-based products and services coupled with a minimal increase in state funding for the 2008-2010 biennium.

Superintendent Johnson

August 1, 2008

Page 2

Now that the merger has been accomplished, the Mercer County School Board and superintendent can look to the next phase of growth. The board should consider a revision to its Comprehensive District Improvement Plan (CDIP) to address fiscal issues and student achievement goals relative to the resources available, with continued community and staff involvement. The district public relations and communications plan, including school and district culture, should be reviewed and revised as necessary. The superintendent should make use of the district budget committee to advise the superintendent and school board on school and community concerns regarding the budget.

In conclusion, the review shows evidence that steps are being taken to contain expenditures in proportion to the revenue provided. As with all school districts, prudent fiscal management of resources must remain a top priority along with enhanced achievement opportunities for all students. Especially in these difficult economic times, districts must do all that they can to ensure that students, staff and community feel confident that the board and district administration are making wise fiscal decisions. Please see the attached report for a complete summary of the findings and recommendations.

Sincerely,

Larry G. Stinson, Ed.D.

Associate Commissioner

Office of District Support Services

LS/ms/cm

Request	The Mercer County School District (MCSD) and Superintendent Johnson requested a Kentucky Department of Education (KDE) management audit to assist them in a district response to local inquiries regarding sound fiscal practices. Rather than conducting a full scale management audit, a financial review was conducted by KDE staff based on published materials from the school district, i.e. audits, news articles, budgets, state reports and other requested information. All staff, board and community members were helpful and informative when KDE staff needed additional information.
Background	In May 2008, the Mercer County school board met to discuss cost saving strategies for the 2008-09 school budget. Several options were presented to the board including staff reduction, program cutbacks, and a brief discussion of a reduction in salary schedules. In particular, the existing full day Kindergarten program was considered for reduction to a half-day program. The economic impact of higher fuel costs and resulting higher costs in all areas of school operation for utilities, maintenance and transportation added to the critical need for the school board to adopt a sound budget to contain expenditures within the revenue streams. After public dialogue and review of total commitments, the board chose to maintain the full day Kindergarten program for the 2008-09 budget year pending an analysis of all district programs to determine which are self sustaining and which will require subsidies from the general fund. Most staff reductions were accomplished through attrition. Programs and services were combined and streamlined where possible. Salary schedules were left intact.
Findings	The budget that was adopted by the school board meets KDE requirements.
	The district merger with Harrodsburg Independent School District (HISD) in July, 2006 posed challenges to cash flow, revenue, and debt service for Mercer County Schools. HISD had a significantly higher salary schedule than Mercer County and raises had been in excess of the state funded mandates. The HISD salary schedule was adopted by the Mercer County school board, creating a significant impact for all future budgets, since more than two-thirds of any district budget is absorbed by staff and accompanying fringe costs. (e.g., retirement, social security, unemployment insurance, worker’s compensation, and health insurance contributions based on the escalating salaries.) In addition to an annual salary schedule increase, most staff members receive raises based on rank and step increases in the approved district salary schedule.
	The merged district also took on the lease payment obligations and bond indebtedness of HISD. MCSD purchased land in 2006 and began construction of a new Mercer County High School building, scheduled for completion in August 2008, in addition to existing lease obligations and indebtedness. These debts require annual payments on the principal and interest for many years to come and must take first priority in budget planning. As MCSD developed a revised facilities plan based on its student achievement success plan, the resulting building-use profile and staffing patterns required adjustments in plan priorities and funding to provide necessary materials and infrastructure. (See page 7 Future Budgetary Implications, MCSD audit 6-30-2007 by Critchfield & Critchfield.) It is the opinion of KDE personnel that MCSD now has a surplus of physical space.
	Questions were raised by the community regarding carry forward funds from HISD, the current superintendent’s salary, the final year salary for the former superintendent of Harrodsburg Independent along with various other concerns. There appear to have been conflicting expectations within the community regarding the amount of carry forward funds anticipated from HISD. While those in district leadership were well aware of the facts, the actual amount was less than many in the community expected. Regarding the salaries of the current and former superintendents, comparative data from neighboring districts can be useful in local decision-making, but each local board of education is free to set salaries at any level it deems appropriate. KDE personnel did not detect any irregularities in the established salaries of these administrators. The other concerns were addressed to the satisfaction of KDE personnel by the MCSD staff and school board.
	The Mercer County School District was very successful in its effort to maintain and adopt new and old traditions and the community was receptive to the opportunities that would be afforded to students in the merged district. A concerted effort to preserve historical traditions took place. The overall public perception is that this is a good community with exciting initiatives taking place and a good school system to educate children. This was evident in the community component of this review.
Summary Recommendations KDE Contacts	The district is in sound financial condition and the board is committed to making the best possible educational opportunities available for the children of Mercer County. The superintendent and finance officer are experienced leaders in Kentucky education and are well regarded among their peers. Economic impact is continuing to limit expansion of programs and services, requiring some realignment with what the district realistically can afford. Expenditures must be contained within revenue provided and this should be a vital consideration upon which all decisions relate and are based accordingly. 1.) The local board should communicate the procedures made available for the public to make inquiries and receive answers when they have concerns. 2.) The board should revise the Comprehensive District Improvement Plan to address fiscal issues and student achievement goals relative to the resources available, with continued community and staff involvement. 3.) The district public relations and communications plan and policy should be reviewed and revised as necessary. 4.) The district should engage in a Culture Audit to gain additional information about how to improve the culture for communication and learning in the district. 5.) The district budget committee should be better utilized to advise the superintendent and school board on school and community concerns regarding the budget. Please do not hesitate to contact KDE staff for further information or assistance: Kathy Thomas, KDE Finance Field Staff Kathy.Thomas@eduaction.ky.gov Phone: 859-229-3214 Linda Martin, KDE Management Consultant LINDAPMARTIN@aol.com Phone: 502-229-6559 Michelle Sutton, Division Director Michelle.Sutton@education.ky.gov Phone: 502-564-3846

EXHIBIT