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Performance Audits:
How to Measure Up When the Economy Is Down

By Emily Frazee - Public Affairs Staff Writer

Just as Ohio families are feeling the sting of a struggling economy, the communities they live in and the schools their children attend face growing pressures to balance budgets, maintain needed services and deal with plunging revenues. These problems are particularly difficult in communities where major employers have closed their doors or made dramatic reductions in employment.

“Our auditors are keeping an especially close watch on communities impacted by business closures and cutbacks,” Auditor of State Mary Taylor said. “We want to identify potential budget problems before they become unmanageable. Our Performance Audit section provides valuable recommendations to assist local governments and help them through difficult times.”

Taylor said the first step toward fiscal recovery is to identify the extent of the problem. In fact, state law provides a formula for quantifying an entity’s budget crisis against established criteria and outlines state involvement. For local governments, the budgetary problem may meet the statutory threshold to place the entity in the status of fiscal watch or fiscal emergency.

To determine whether an entity has fallen into either category, the Auditor of State will conduct a fiscal analysis to determine the severity of the financial situation. That analysis can be requested by a government entity’s leadership or – in an urgent situation – the Auditor of State can initiate the process.

“If our analysis shows that a deficit in a local government’s general fund, or in any other funds, exceeds one-twelfth of the total general fund budget, then the local government is placed on fiscal watch,” Taylor explained. “If the deficit exceeds one-sixth of the total general fund budget, the local government is placed in fiscal emergency. In the case of a fiscal emergency, a state commission is created to oversee the government’s financial operations and develop a recovery plan,” she said. The government will retain its designated fiscal status until a new Auditor of State’s analysis determines the watch or emergency can be lifted.

Ohio school systems are not immune to the budgetary pressures facing other units of government, and their financial problems are also categorized with criteria set by state law. In the case of schools, designations of financial distress are rated as fiscal caution, fiscal watch or fiscal emergency. The Ohio Department of Education and the Auditor of State’s office jointly work to make fiscal watch and emergency designations. The two agencies then work with each affected school district to provide guidance and technical assistance to help prevent the financial condition from getting worse.

By law, Ohio schools fall into watch or emergency only after an analysis is conducted by Auditor Taylor’s office. A fiscal watch is declared when the analysis shows that financial problems threaten a school’s ability to operate. If the analysis reveals that the district is in a severe situation, then it is placed in fiscal emergency. When a fiscal emergency is declared, a commission must be created to assume the powers of the board of education (the commission decides what powers they want to assume) and develop a plan for recovery.

In both settings – governments and school districts – the fiscal distress designation is a legislative mechanism used to identify financial problems as soon as possible and to provide the assistance needed to keep a bad situation from growing worse.

One way for a financially troubled local government or school district to address its fiscal issues is to participate in a performance audit. A well-proven financial assessment and management tool, the performance audit process examines how efficiently and effectively an entity’s tax dollars are being used. Auditors measure the entity’s performance against peer-group benchmarks and offer recommendations for cost savings and operational improvements.

“The Auditor of State has professional staff who can work hand-in-hand with any local government that is dealing with financial hardship,” said Randy Cole, director of performance audits and local government services for Auditor of State Mary Taylor. “Our staff is equipped to offer the accounting and budgeting assistance that is needed for the most complex situations.”

Any unit of government or public school system in Ohio can request a performance audit. In fact, since Auditor Taylor took office in 2007, more than 60 taxpayer-funded agencies have taken advantage of this service. “Each performance audit is designed to meet the specific needs of the client,” Cole said.

“In the past two and a half years, the Auditor of State has made more than 2,205 cost-cutting or operational recommendations based on performance audits. In total, those recommendations could save an estimated $106,337,773 annually for our clients,” Cole said.

According to Betsy Bashore, the Auditor of State’s assistant chief performance auditor, there are a number of ways for a government to save money when revenues are in decline. For example, when financial resources are tight, it may be a good time to freeze or downsize capital projects. Projects can resume when revenues are healthy again. Also, an economic downturn may be a good time to implement a hiring freeze. This helps correct the size of a government operation by slowly eliminating vacant positions. It also reduces the impact on staff morale.

Bashore said that neighboring units of governments should work together during times of financial hardship to explore whether combining operations and sharing resources can save money. “Think about sharing emergency dispatch services, ambulance coverage or school transportation services, for example,” Bashore said.

Additionally, governments and school systems can also partner with one another to save on purchases. Goods and services are generally less expensive when purchasing through a partnership or consortium. “Just like families who clip coupons and keep on the lookout for sales, government should make sure that they are getting all the possible discounts they can,” Bashore said. “Use vendor discounts, like those for volume purchases and for timely payment. And never pay late fees on bills.”

Performance audit specialists in the Auditor of State’s office are available to counsel Ohio government agency and school officials about cost-saving strategies and other ways to improve operational efficiency and effectiveness, especially in light of the current economic downturn. To schedule an appointment with Ohio Auditor of State performance audit staff, call 1-800-282-0370 or e-mail crcole@auditor.state.oh.us.