Letter from Bob Berg: Honesty is the Best Policy

(This letter was written by Scarsdale resident Robert Berg)
My message to the Administration and the School Board is best expressed by Pete Seeger in "Where Have All the Flowers Gone?": "Oh, when will you ever learn!" Last night's Board meeting presented the Administration and the Board with an opportunity to explain with at least some honesty and transparency the bombshell they dropped on the community last week at the Special Meeting. At the March 30th Special Meeting, they disclosed for the first time that the District screwed up its payment of payroll taxes to the federal government over multiple quarters, and the District owes the U.S. Treasury $1.77 million in interest and penalties. But as usual, the Administration and Board, instead of owning this bad situation and dealing with it openly, are engaging in a cover-up along with some wacky accounting that can only lead to further disaster down the road.

Founding Father Ben Franklin always said it right: "Honesty is the best policy." As soon as the Administration learned about the errors in the federal payments of payroll taxes -- which the Administration has admittedly known about for many months -- the School Board should have been immediately informed. Astoundingly, the Board tells us they first learned on March 25, 2022 about this unprecedented payroll tax payment mess; the ensuing IRS investigation; the massive amount of interest and penalties assessed against the District; and last night, we learned about a $1.7 million lien the IRS had placed against the District last summer.

I think we're being played for fools. The District has admittedly been negotiating with the IRS for months. This means that this District had to have engaged special tax counsel, and the Board would have had to have been informed about this very material and serious tax problem and the ramifications for the District's finances. Indeed, the Board likely would have had to authorize the hiring of the special counsel. Moreover, every member of the Board serves on the Board's Audit Committee. Is it at all credible that the District's outside auditors would not have informed the Audit Committee about the IRS investigation and negotiations and a $1.7 million IRS lien asserted against the District? The auditors have a fiduciary duty and professional obligation to keep the Audit Committee fully informed. Have they violated those duties? Very doubtful -- I'm certain that at least individual Board members have known, probably for months, what's going on, and have not told the public anything.

Let's assume the Board is telling the truth -- that is, every Board member had been kept entirely in the dark until March 25. If that's really what happened, then the whole Administration should be fired immediately. Failing to advise the Board about such a huge problem in internal controls, a major federal tax investigation of the District, a $1.7 million IRS lien, and substantial ramifications to the District's AAA credit rating, outstanding paper, and the upcoming budget, among other things, constitutes gross malfeasance on the part of the Administration, and demands immediate termination.

Has the District or the Board notified the State Department of Education about this situation? How about the State Comptroller's Office which oversees the finances of all New York State public school districts? Shouldn't these supervisory agencies be told?

"Something is rotten in the State of Denmark." Hamlet, Act I, Scene IV (67).

At the beginning of tonight's meeting, Board President Ceske shamelessly stated with a straight face: "The Board is committed to providing transparency." LOL. She then proceeded to provide a bizarre "clarification" of Stuart Mattey's wholly unsatisfactory explanation at the March 30th special meeting. Ms. Ceske asserted that a "keying" error occurred when making a Q1 2020 deposit, resulting in the Q1 payment being made late. The IRS then assessed a "failure to deposit" penalty. OK, seems like the IRS properly assessed the penalty, no? Then the District screwed up again - a Q3 payment was applied to Q2 and a Q4 payment was applied to Q3. The IRS assessed "failure to deposit penalties" for Q3 and Q4. These "failure to deposit" penalties weren't chump change. Ms. Ceske said they amounted to $1,309,636.81. Wow! The magnitude of the error needed to generate such huge penalties in such a short amount of time hasn't been disclosed, but it must be pretty big.

According to Ms. Ceske, the IRS applied the Q3 and Q4 tax payments, which the District had erroneously misallocated to Q2 and Q4, to pay the first "failure to deposit" penalty of $861,320. This led to a tax shortfall owed to the U.S. Treasury of $843,558 in Q4 of 2020. It turns out that this tax shortfall payment of $843,558 is the payment the Board authorized the Treasurer to pay at its March 30 Special Meeting. So the District is paying the IRS taxes back taxes owed of $843,558. Under standard accounting principles, paying taxes is an expense. But miraculously, as Stuart Mattey and Ms. Ceske explained, our District has been cleared by our auditors to book this tax payment as an "accounts receivable." This is an accounting gimmick. When you owe money on account, you have what's called an "accounts payable." So when you owe back taxes, these back taxes are booked as accounts payable. But if you say Scarsdale-cadabra, our District auditors allow us to transmogrify an accounts payable into an accounts receivable just like that. Who'd have thunk that mighty Scarsdale would sink to such a Trumpian accounting abyss? But here we are.

Stuart argues that this is all one big misunderstanding. Sure, the District messed up the "timing" of the payments, but we're paying everything we owe, so the District really shouldn't have to pay any penalties or interest, and we should get a refund for all of that -- to the tune of $1.3 million. And we've filed for abatements and refunds and abatements, and we've been talking with the IRS and they're really nice people and they're saying some nice things to us. So we are going to book the $843,558 back tax payment as an accounts receivable because we've got a decent chance of getting it back someday, maybe this year, maybe next, maybe never.

The thing is -- under real accounting rules like GAAP, you can't book monies as an accounts receivable unless you have a clear legal right to those monies and a high degree of certainty of collecting those monies in the near future, but certainly within 12 months. The District has, at best, a contingent claim for a refund of the $843,558. The IRS has not promised in writing to refund the monies to the District. All the IRS has done, maybe, is engage in some friendly discussions. Unless there's a signed agreement in writing for the refund by the IRS payable to the District within the next 12 months, the District's tax payment of $843,558 cannot be booked as an accounts receivable. It's bad enough that the District is a tax deadbeat. It shouldn't stray into cooking the books too.

Now why does this all matter? Stuart says this won't affect the budget at all -- it's just a cash flow issue. That's another lie. The $843k tax payment has to be booked as an expense. This expense has not been budgeted for, and so, the District must draw down its reserves to pay for this unanticipated expense. It can't carry the $843k as an asset on its books because there's no certainty of a refund. Now, remember, the proposed budget for next year is about to be finalized, and will be voted upon by the public in the middle of May. The proposed budget is just a smidgeon ($75k) below the tax cap. This $843k tax payment, if properly accounted for, reduces the reserves by that amount. If the District wants to maintain reserves at the proposed level, the District will have to raise taxes by another $843k to make up for the tax payment. This blows a giant hole through the tax cap. The ramifications are substantial. Very few "above the tax cap" school budgets are presented to voters each year in New York State because voters generally reject those budgets. A budget that's over the tax cap requires 60% of voters to vote in favor (a super-majority) in order to pass. The one time Scarsdale tried this in 2013, the school budget failed -- the first time a school budget failed in Scarsdale in 45 years.

What's worse, if the District keeps the $843k payment in the books as an accounts receivable - in violation of generally accepted accounting principles --- then the budget residents will be voting on in May will illegally appear to be within the tax cap -- and require a simple majority vote for passage -- when, if GAAP were followed, the budget would really be above the tax cap and require a super majority vote for passage. If the District puts forth a budget for public vote that doesn't conform with GAAP, the entire budget vote may be illegal. The District is placing everything in great legal jeopardy because it won't honestly and openly address its IRS problem and its federal tax pickle. We residents deserve much more from the Administration and Board.