News Story

Mismanagement, Incompetence Made Benton Harbor Schools A Financial Basket Case

Auditor’s notes blast leadership at a well-funded school district

In September 2014, the state of Michigan intervened to address financial mismanagement at Benton Harbor Area Schools. As a result, the state and the school district entered into a consent agreement that was supposed to resolve a number of problems. Local school officials believed that this would mean progress in resolving the financial turmoil that had left the school district with millions of dollars of debt.

Yet, over the next two school years, the district failed to complete the financial reports required for its annual audit, causing an independent auditor to do the task when it reviewed the district’s finances. In 2015, auditors found $2.77 million in expenditures the Benton Harbor finance team had overlooked.

The notes auditors included in their reports from 2011 to 2018 depicted a school district that appeared incapable of managing its own finances, with leaders having little idea of where taxpayer dollars were going.

“The district did not prepare its own financial statements,” the auditing firm said in both 2015 and 2016, and its employees then completed them. By not preparing the statements, the notes said, the district had put the auditing firm’s independence at risk.

The local school administration was incapable of completing basic financial reports, according to the auditors. “There was no person available in the Business Office with the skills and knowledge to apply governmental auditing standards in recording the entity’s financial transactions or preparing its financial statements,” the firm said in 2015.

In 2011 and 2012, the accounting was so sloppy that district officials could not say how much cash they had on hand, according to the auditor.

The state of Michigan has given the Benton Harbor school district until today, June 14, to offer an alternative to its most recent cost-cutting plan, which is to close the district’s lone high school and send its students to schools in nearby districts.

The local newspaper, The Herald-Palladium, claimed the state had disinvested in the school district. Benton Harbor Mayor Marcus Muhammad told the newspaper he thinks race played a factor in the state’s decision.

Benton Harbor Area Schools began accumulating debt from persistent overspending in the 2006-07 school year. Between 2011 to 2018, the district’s cumulative indebtedness grew from $16.4 million to $18.0 million, the latter equal to two-thirds of its $27.2 million annual budget.

Here are just of a few of the findings — and scorching observations — returned by the independent auditors who reviewed the district’s annual financial reports during the recent seven-year span:

  • In both 2011 and 2012, auditors reported that district officials did not “have a true reflection as to how much cash was on hand during the year.”
  • In both 2015 and 2016, auditors reported, “The district did not prepare its own financial statements,” adding that they ended up completing them for the district.
  • Also in 2018, auditors reported that the district said one school served a certain number of student meals in a single day — which was more than the number of students enrolled.
  • Throughout seven years of district overspending, auditors reported numerous examples of officials submitting reimbursement claims for federal grants even though they never incurred those expenses.

The audited financial reports also show a school district budgeting process that routinely over-projected enrollment, meaning that spending plans could not be supported by actual revenue. The deficits that resulted accumulated into the district’s current $18.0 million debt.

For example, the school administration projected in its 2017-18 annual financial report that the district would lose 120 students in the next fiscal year. But instead, enrollment dropped by 214 students – and with the decline, the district lost all the money that accompanies a student enrolled in a district.

Michigan state law makes school districts – which means the local school boards elected to run them – responsible for “accounting for ... public school money.” Another law requires violations to be reported to the Office of the Attorney General for investigation and possible criminal proceedings.

Benton Harbor Area Schools has historically been one of the better-funded districts in Michigan. One explanation is that it’s eligible for various federal grants for having so many students who are designated as “economically disadvantaged.” In the 2018-19 school year, 83% of Benton Harbor’s 1,941 students were designated as such.

Federal dollars accounted for $6.9 million of the district’s $30.6 million in total revenue in 2018. Some of this money was available to pay certain employees, and the district was supposed to track the duties of those staff members.

Yet, according to audit reports, the school district continually violated the terms of the federal grants, jeopardizing future awards and putting it at risk of having to repay the money.

In 2012 and 2013, the district submitted reimbursement requests for grant money it never spent, causing the Michigan Department of Education to demand it pay $323,677 in 2013. In 2015, the district overpaid at least 10 employees, whose compensation was covered by a federal grant, by $133,245. And for years, the district repeatedly failed to require certain teachers to complete forms stating what duties they performed, something it was supposed to do.

Auditors repeatedly advised the district to create a written policy on how to comply with federal grants, but it did not follow through.

The district also was reimbursed for the federal lunches it provided at reduced or no cost to its poor students. But auditors found little oversight of the food service.

In February 2018, the district submitted reimbursement requests for 40 percent more meals than it served to students.

The Grand Rapids-based auditing firm – Hungerford Nichols CPAs and Advisors – referred questions to the district.

Michigan Capitol Confidential is the news source produced by the Mackinac Center for Public Policy. Michigan Capitol Confidential reports with a free-market news perspective.