On student activity accounts

My own life has made it impossible for me to get this up earlier; apologies for how long this has taken. 

Back before state politics pushed it off the front page, much of the concern over the City of Boston's IRS fine for a variety of issues was around the schools. Do note, however, the details of the case:

In all, the IRS issued seven findings, four of which centered on mismanagement of student activity accounts at more than a dozen Boston schools. The three other findings focused on city payrolls. In addition to the Medicare deductions, the city was cited for a failure to deduct “deferred compensation” for some employees who do not qualify for the city’s pension plan and overtaxing some earnings.

I had gotten exactly this far in posting when Burlington Superintendent Eric Conti's post on his district's student activity accounts came across my Twitter feed; if you're looking for a local perspective on what an audit and district response looks like, give it a read.  

There's a lot to talk about there, 'though the Globe editorial board captured my main puzzlement over the whole thing, which is the degree to which Superintendent Chang was getting blamed for a mess. Most of the fine was municipal, not schools, and the error appears to well predate him; what came to his attention he appears to have worked to correct.  The biggest error he seems to have made was not letting his Committee know as soon as possible (truism about district governance: never let your school committee find out something about the schools from the front page!)

The IRS audit found federal (and, relatedly, state) tax issues. This did flag a SEPARATE issue of the use of student activity accounts.

I do want to stress here, though, something which I think got somewhat lost in the coverage: the IRS was not (and does not) audit for the use of student activity accounts. The IRS was auditing around tax payments, and, because student activity accounts were being used to pay for staffing without paying for taxes, they were flagged. They weren't flagged for the use, though: they were flagged for the non-payment of taxes.

So what ARE student activity accounts, anyway?
They're covered under MGL Ch. 71, section 47, which reads as follows (if it looks too long, read the bold sections):

Notwithstanding the provisions of the preceding paragraph or section fifty-three of chapter forty-four, the school committee of a city, town or district may authorize a school principal to receive money in connection with the conduct of certain student activities and to deposit such money, with the municipal or regional school district treasurer, into an interest bearing bank account, hereinafter referred to as the Student Activity Agency Account, duly established by vote of the school committee to be used for the express purpose of conducting student activities. Interest earned by such Student Activity Agency Account shall be retained by the fund and the school committee shall determine for what purpose such earnings may be used. In addition to such Student Activity Agency Account, the school committee may authorize the municipal or regional school district treasurer to establish a checking account, hereinafter referred to as the Student Activity Checking Account, to be operated and controlled by a school principal and from which funds may be expended exclusively for student activity purposes for the student activities authorized by the school committee. Such account shall be used for expenditures only and funds received for student activities may not be deposited directly into such account.
The school committee shall vote to set the maximum balance that may be on deposit in such Student Activity Checking Account. The principal designated to operate and control such Student Activity Checking Account shall give bond to the municipality or district in such amount as the treasurer shall determine to secure the principal's faithful performance of his duties in connection with such account. To the extent that the funds are available in such Student Activity Agency Account, funds up to the maximum balance set by the school committee shall be transferred from the Student Activity Agency Account through the warrant process to initially fund such Student Activity Checking Account.
Periodically, to the extent that funds are available in such Student Activity Agency Account, the municipal or regional school district treasurer shall reimburse such Student Activity Checking Account, through the warrant process, to restore the limit set by the school committee. The principal shall adhere to such administrative procedures as the municipal or regional school district treasurer or accountant may prescribe. There shall be an annual audit of the student activity funds which shall be conducted in accordance with procedures as agreed upon between the school committee and the auditor based upon guidelines issued by the department of education.

Important point: the accounts exist solely to fund student activities, and not just "activities of students," but specific, school-recognized organizations (the band, the senior class, and so forth, though this may be less specific in the elementary schools). It isn't there for general use, but it has to be attached to a specific student activity; note that the specifics of this are to be spelled out through policy which is adopted by the school committee.

This doesn't specifically bar paying stipends (you would still, of course, need to do it legally, with withholding and all!), and I haven't read anything suggesting that anyone has weighed in on that. A good case, of course, would have to be made that the stipends were not just useful to the school, but specific to student activity (and don't take that as legal advice!).

Note further that there are in effect two accounts: there's one account the money goes into (the Student Activity Agency Account) and there's one it comes out of (the Student Activity Checking Account); the checking account has a maximum balance, set by School Committee policy, and money can only be transferred from where the money is deposited to where it is spent by the regular funding process (this is usually warrants; it isn't in Boston). Also, those handling the funds have to be covered under the municipal (or district) bonding.

The accounts MUST--and this is new!--be audited annually. I'm going to recommend here that those interested look at MASBO's guidance, updated last year (that's a Word doc), which reads in part as follows:

The Superintendent or the School Business Administrator shall arrange for the annual audit, not the bookkeeper or the principal involved with the student activity account. The audit may be an internal audit performed internally by someone completely independent of the process or an independent third party if so approved by the School Committee; the internal audit must be documented. At least one time every three years, however, an independent audit firm must perform the audit. The School Committee may elect to have all annual audits done by an independent audit firm.
The dissemination of all audit reports should follow School Committee policy.
The cost of the independent audit may be paid by the School Committee from its budget or from the interest earned on the student activity account. The School Committee should specify in its Policy how the cost of the audit will be paid.
In addition to the annual audit, there should be on-going internal reviews by the School Business Administrator or another designee of the Superintendent. These internal reviews should involve reviewing the monthly reports prepared by the individuals having daily oversight over the accounts.

Worcester updated its policy when the guidance came out to provide for annual external student activity account audits. Thus the provision of an external audit for Boston isn't really that big a deal, 'though $600,000 is still a lot of money! It is very concerning, though, to read this from Mayor Walsh:

"These accounts were launched in the early '90s; they have never been reviewed or audited until now."

To be honest, I mostly hope he's just wrong about that. The requirements changed last year, but there was always a requirement that the accounts be audited.
There is also an explicit requirement for ongoing internal reviews of the accounts under the oversight of the superintendent and the school business administrator.

I'm going to flag here how often the School Committee and the policy they pass is part of the above. I can't find the BPS policies on the website--that may just be me!--but that would be the only other piece, since now there is a change in procedure, including an annual audit, that I can see missing.
(Curious about what that might look like? Check out JJF.)