Auditor Of Public Accounts
State Auditor Crit Luallen Announces Study of Local School Districts' Flexible Spending Accounts - Streamlining Management Could Bring Half a Million Dollars to State's Coffers

Press Release Date:  Thursday, October 06, 2005  
Contact Information:  Jeff Derouen
Phone: (502) 573-0050
Fax: (502) 573-0067
Pager: (888) 222-5670

State Auditor Crit Luallen released a study of Flexible Spending Accounts under the purview of the Kentucky Department of Education.  A streamlining of the management of the state's Flexible Spending Accounts could add over a half a million dollars to the Kentucky's General Fund.  The Auditor's Office became aware of variations in the administration of the Flexible Spending Accounts during audits, requested by the Kentucky Board of Education, of the various Education Cooperatives throughout the Commonwealth.

"In light of the budget crisis that has befallen state government, we need to ensure that every dollar that can be used for education and Medicaid can go to these necessary yet under funded programs.  If we simplify, or even combine all management of our public employees' Flexible Spending Accounts, we can add $553,582 to Kentucky's budget," Auditor Luallen said.

All state and school district employees are offered a Flexible Spending Account as part of their employment.  Each employee who waives the Commonwealth's insurance plan receives a $234 per month contribution to his or her Flexible Spending Account.  Employees can also elect to contribute personal money via payroll deduction.  The pretax deferments and contributions can be used for medical and childcare expenses.  Money left over in the accounts at the end of each year, regardless of source, is forfeited to the General Fund for use as the General Assembly sees fit.

The Personnel Cabinet and Finance and Administration Cabinet contract with a single vendor to administer the plan for state employees.  Each separate local school district, however, has the discretion to select a vendor to manage the district's plan.  All the plans cover similar programs yet are managed in materially different ways.

As a result, there exist 177 different management arrangements for state government's Flexible Spending Accounts: one for all employees of the Commonwealth and 176 separate ones for school districts.  Administrative charges for the separate plans range from $2 per month per employee to $16 per month per employee.

"These excess administrative charges come directly out of the money returned to Frankfort each year that could be used to balance our budget," Luallen added.  "Either the Personnel Cabinet should include all school district employees in the same contract with state employees or, at the least, the Department of Education and the local school districts should develop a standard contract for use with Flexible Spending Account vendors to provide for fund protection, standardized financial statements, and standardized fee agreements."

The Auditor's study also recommends that the Kentucky Department of Education should be provided clear statutory authority and the necessary staff resources to monitor the contracts entered into by local school districts.  The changes would not impact money available to school district employees for medical costs and childcare.