DENVER – Denver Preschool Program Inc. might be able to help more kids and preschool providers if it did not save more than necessary and if it invested its millions of dollars in reserves more profitably, according to a new audit from Denver Auditor Timothy M. O’Brien, CPA, of the Office of Children’s Affairs and the city’s nonprofit preschool program.
“We found inadequate financial oversight by the city for the Denver Preschool Program,” Auditor O’Brien said. “City officials and nonprofits overseeing voter-approved tax use should look at this example and do better. These tax dollars should be subject to the same scrutiny and accountability as any others spent by the city.”
Denver Preschool Program Inc. is a nonprofit that operates independently using dedicated tax dollars, but the city is still responsible for financial oversight of the program. The program offers tuition credits to qualifying families and offers financial support for quality improvement to preschool providers.
Auditors found the preschool program has accumulated more than $20 million in unspent tax revenue. This excessive accumulation could have limited opportunities to expand access to quality preschools to more Denver children.
According to city ordinance, the nonprofit is required to spend at least 93% of its budget on tuition credits, quality support, and program services. Although the organization is spending less than the maximum 7% on administrative costs, it is still not spending the minimum 93% on program services.
Organization officials had a different interpretation of the ordinance that they believed did not require them to spend 93% each year. As shown in the figure on the right, the organization was not budgeting to that 93% even as program spending increased from 2015 to 2018. Not budgeting to or spending at this minimum 93% threshold allowed unspent tax revenue to grow in the program’s operating reserves.
The increase in reserve funds also happened after voters approved an increase in the city’s sales and use tax in 2015, raising it from 0.12% to 0.15%. Although the preschool program started spending more money on program services, the number of children receiving tuition credits remained steady. Therefore, as shown in the figure below, the amount of operating reserves started to greatly exceed the amounts set in the organization’s annual budget.
With more money coming in and spending not increasing to match, the Denver Preschool program ended up with a lot of savings. Between 2015 and 2018, reserves exceeded expected levels by as much as $10.3 million.
“Wasteful resource allocation could mean missed opportunities to expand the tuition credit to cover more kids, to support more preschools, or to return some of the excess money to taxpayers,” Auditor O’Brien said.
As noted in the figure below, the percentage of student participants in the preschool program from the Tier 1 category of highest need decreased significantly from the 2014-15 school year to the 2018-19 school year. While Tier 1 continues to be the most common tier, its percentage out of all participants has decreased steadily. While the preschool program has increased spending for all tiers, the reserve balance continues to grow.
The lack of a formal, well-defined operating reserve policy that reflects sound budgeting and financial planning impairs Denver Preschool Program Inc.’s ability to navigate risks that could adversely impact the organization’s financial performance. In addition to the lack of an operating reserve plan, insufficient financial planning has contributed to missed investment opportunities.
Auditors found the preschool program could be using the large amount of reserves to bring in more interest, which could in turn be used to support the program. However, auditors found the nonprofit is not using its large operating reserve effectively.
The reserves were invested in a commercial money market account, which yielded about $50,000 from 2015 through 2018. Auditors’ analysis showed the organization could have brought in as much as $1.1 million in return on investment in that same time frame, if it had invested the money in the City and County of Denver’s portfolio or some other investment alternative instead.
The audit also found weaknesses in contract monitoring and failures to follow leading practices for nonprofit management.
Altogether, this reflects inadequate oversight of the Denver Preschool Program, which prevents the city from leveraging opportunities to expand eligible Denver residents’ access to quality preschools.
“Denver voters recently approved new dedicated taxes for school scholarships, healthy food, and mental health last year – revenue that, not unlike the Denver Preschool Program, will be spent by third parties under the city’s oversight,” Auditor O’Brien said. “This audit of the Denver Preschool Program shows it is important for the city to give the same level of oversight to these third-party organizations spending tax dollars as it would to any third-party contract for services.”