720-913-5000 auditor@denvergov.org

Audit Report

Denver Preschool Program – Office of Children’s Affairs

To assess the effectiveness of the Denver Preschool Program’s efforts to increase access to and quality of preschool programs for Denver residents—including the City and County of Denver’s oversight and management of program administration and expenditure of funds derived from the Denver preschool tax.

Watch the Audit Committee presentation here soon.

In 2006, Denver voters approved a city ordinance that provides for the governance and administration of 0.12 percent (now 0.15 percent) of the city’s sales and use tax to fund the Denver Preschool Program— which served over 4,000 children in 2017-18.

Since 2007, the program and related expenditures have been administered by Denver Preschool Program Inc., which has the mission of helping every child in Denver enter kindergarten ready to reach their full potential by “championing, funding, and increasing access
to quality preschool” across the community.

As of February 2019, the city’s Office of Children’s Affairs is responsible for the financial oversight of the Denver Preschool Program, in addition to its duties of contract oversight.

Our audit found the city inadequately monitors the Denver Preschool Program’s financial management practices—including the accumulation of excessive revenue from the Denver preschool tax.

The City’s Insufficient Oversight Left the Excessive Accumulation of Denver Preschool Program Funds Unchecked, which Limited Opportunities to Expand Program Participation

  • Denver Preschool Program Inc.’s budgeting and spending practices do not fully align with thresholds codified in city ordinance.
  • Denver Preschool Program Inc. has accumulated over $20 million in unspent Denver preschool tax revenue but has no formal plan for this operating reserve. This impairs the organization’s ability to navigate risks that could adversely impact the program’s operations and financial performance.
  • Denver Preschool Program Inc. does not have a well-defined policy to guide investment of the organization’s operating reserve balance. Because the operating reserve funds are in a commercial money market savings account, the return on investment was only about $50,000 from 2015 through 2018. We estimate the return on investment in that time frame could have been 10-20 times more if the money had been in a traditional investment portfolio instead.
  • The Office of Children’s Affairs’ and Denver Preschool Program Inc.’s contract administration practices do not reflect leading practices for monitoring contract compliance, which impairs the city’s ability to ensure Denver Preschool Program Inc. and third-party vendors deliver in a manner that reflects the terms and conditions of the contracts and that prioritizes good stewardship of taxpayer dollars.
  • The Denver Preschool Program Board of Directors lacks policies and procedures to ensure effective program oversight, to guide decision-making, and to support board operations.

1.1 Align Practices with City Ordinance – The executive director of the Office of Children’s Affairs should work with Denver Preschool Program Inc. to ensure its budgeting and spending practices conform with thresholds established in city ordinance and the city’s contract with the Denver Preschool Program.

Agency Response: Agree, Implementation Date – March 31, 2020

1.2 Establish Well-Defined Operating Reserve Policy – Consistent with leading practices for nonprofit management, the Denver Preschool Program Board of Directors should direct Denver Preschool Program Inc. to develop and adhere to a well-defined operating reserve policy that establishes and maintains an operating reserve that supports program operations in a manner consistent with city ordinance and contract terms.

The operating reserve policy should also reflect leading management practices for nonprofit management—including incorporating a five-year financial forecast for all aspects of the organization, developing methods for understanding risks to the organization’s short- and long- term financial planning, and establishing target reserve levels and funding approaches. The operating reserve policy should also define roles and responsibilities for authorizing spending, monitoring balances, and reporting on use of the operating reserve.

Agency Response: Agree, Implementation Date – March 31, 2020

1.3 Monitor Program Appropriations – The executive director of the Office of Children’s Affairs, the Denver Preschool Program Board of Directors, and the president and chief executive officer of Denver Preschool Program Inc. should continuously monitor and consult with the city’s Department of Finance to determine the extent to which Denver Preschool Program appropriations should be adjusted in compliance with “budget/carry forward” provisions outlined in the city’s contract with Denver Preschool Program Inc.

Agency Response: Agree, Implementation Date – March 31, 2020

1.4 Review Program Distribution Formula – The executive director of the Office of Children’s Affairs, the Denver Preschool Program Board of Directors, and the president and chief executive officer of Denver Preschool Program Inc. should consult with the city’s Department of Finance and the City Attorney’s Office to determine whether the distribution formula established in the city’s contract with Denver Preschool Program Inc. should be amended to more appropriately reflect the program’s current resource needs.

Agency Response: Agree, Implementation Date – March 31, 2020

1.5 Establish a Formal Investment Policy – The Denver Preschool Program Board of Directors should direct Denver Preschool Program Inc. to develop and adhere to a formal, documented investment policy consistent with city ordinance, the city’s investment policy, and leading nonprofit management practices—including identifying opportunities for community impact and articulating the organization’s resource needs.

Agency Response: Agree, Implementation Date – March 31, 2020

1.6 Establish Policies for Contract Monitoring (Office of Children’s Affairs) – The executive director of the Office of Children’s Affairs should develop and adhere to a detailed contract administration plan that includes contract-specific policies and procedures to guide contract monitoring activities related to the city’s contract with Denver Preschool Program Inc. The policies and procedures should reflect contract monitoring guidelines established in the city’s Executive Order 8 and leading practices for monitoring methods, record keeping, and assessing risk.

Agency Response: Agree, Implementation Date – March 31, 2020

1.7 Establish Policies for Contract Monitoring (Denver Preschool Program Inc.) – The Denver Preschool Program Board of Directors should direct the president and chief executive officer of Denver Preschool Program Inc. to develop and adhere to a detailed contract administration plan that includes contract-specific policies and procedures to guide contract monitoring activities. The policies and procedures should reflect contract monitoring guidelines established in the city’s Executive Order 8 and leading practices for monitoring methods, record keeping, and assessing risk.

Agency Response: Agree, Implementation Date – May 31, 2020

1.8 Establish a Formal Whistleblower Policy – Consistent with leading practices for nonprofit management, the Denver Preschool Program Board of Directors should direct Denver Preschool Program Inc. to develop and adhere to a formal, documented whistleblower policy.

Agency Response: Agree, Implementation Date – May 31, 2020

1.9 Establish a Formal Meeting Attendance Policy – Consistent with leading practices for nonprofit management, the Denver Preschool Program Board of Directors should develop and adhere to a formal, documented meeting attendance policy.

Agency Response: Agree, Implementation Date – April 30, 2020

1.10 Establish Formal Financial Literacy Training Policies – Consistent with leading practices for nonprofit management, the Denver Preschool Program Board of Directors should develop and adhere to formal, documented training policies to ensure all board members receive financial literacy training.

Agency Response: Agree, Implementation Date – April 30, 2020

1.11 Review Board Governance Structure Annually – Consistent with leading practices for nonprofit management, the Denver Preschool Program Board of Directors should develop and adhere to formal, documented policies requiring the board to review its governance structure annually.

Agency Response: Agree, Implementation Date – April 30, 2020

1.12 Establish a Formal Board Self-Evaluation Process – Consistent with leading practices for nonprofit management, the Denver Preschool Program Board of Directors should develop a formal process for conducting self-evaluations and documenting the results.

Agency Response: Agree, Implementation Date – April 30, 2020

1.13 Establish a Formal Document Retention Policy – Consistent with leading practices for nonprofit management, the Denver Preschool Program Board of Directors should develop a clear document retention policy to ensure all key documentation is retained in a manner and for a period consistent with the city’s record retention policies.

Agency Response: Agree, Implementation Date – April 30, 2020

The objective of our audit of the Denver Preschool Program was to assess the effectiveness of the program’s efforts to increase access to and quality of preschool programs for Denver residents. This included assessing the City and County of Denver’s oversight and management of program administration and expenditure of funds derived from the Denver preschool tax. I am pleased to present the results of this audit.

The audit revealed the Office of Children’s Affairs has inadequately overseen the Denver Preschool Program and its financial management practices. Specifically, Denver Preschool Program Inc.—a nonprofit organization that operates independently but for which the city is still financially responsible— has accumulated over $20 million in unspent tax revenue designated for the Denver Preschool Program. Denver Preschool Program Inc.’s budgeting and spending practices do not fully align with city ordinance, and the Office of Children’s Affairs’ and Denver Preschool Program Inc.’s contract administration practices do not reflect leading practices for monitoring contract compliance. Further, the Denver Preschool Program Board of Directors lacks a governance structure—including written policies and procedures—that ensures effective program management.

Through stronger spending and budgeting practices, financial planning, contract monitoring, and nonprofit governance, the city will be able to ensure the effectiveness of Denver Preschool Program operations—including improved resource management and allocation practices. Our report lists several related recommendations.

This performance audit is authorized pursuant to the City and County of Denver Charter, Article V, Part 2, Section 1, “General Powers and Duties of Auditor,” and was conducted in accordance with generally accepted government auditing standards. Those standards require we plan and perform the audit to obtain sufficient, appropriate evidence to provide a reasonable basis for our findings and conclusions based on our audit objectives. We believe the evidence obtained provides a reasonable basis for our findings and conclusions based on our audit objectives.

We extend our appreciation to the personnel at the Office of Children’s Affairs and Denver Preschool Program Inc. and to the Denver Preschool Program Board of Directors, who assisted and cooperated with us during the audit. For any questions, please feel free to contact me at 720-913-5000.

Follow-up report

A follow-up report is forthcoming. 

Audit Team: Katja E.V. Freeman, LaKeshia Allen Horner, Darrell Finke, Maria Durant, June Samadi, Samantha Lasher

Methodological Support: Samuel Gallaher, Robert Persichitte