Education and finance officials have begun meeting on how to address a gaping $2 million shortfall projected in this year's school district budget, a revelation last week that stunned Board of Finance members and prompted one to describe the problem as "the Grinch that stole Christmas."

The bulk of the looming $1,988,709 deficit is being blamed on underfunding the district's health insurance fund, which Superintendent of Schools Elliott Landon last week attributed to "some gross errors, but no malfeasance."

Landon, in breaking the bad news to the finance board, said the shortfall was uncovered by the school district's new business administrator, Elio Longo Jr., who had brought it to his attention on Nov. 20.

"From an administrative point of view, there were serious errors in information recording in doing the budget" for the current academic year, according to Landon. He admitted there was a "poor job of budgeting, (but) nothing illegal occurred."

"Give me some smelling salts," reacted Michael Rea, a finance board member, on hearing the news.

Starting to grapple with the gap

At a hastily called workshop Wednesday night in Town Hall, members of the Boards of Education and Finance and the chairmen of the Representative Town Meeting's Education and Finance committees took the first steps toward trying to resolve the projected shortfall.

The $1,988,709 figure includes a $681,309 projected operating deficit and $1,307,400 in outstanding liabilities for incurred, but not yet reported, medical claims by school personnel. There is not enough in reserve to cover the shortfall, officials said.

Elaine Whitney, the Board of Education chairwoman, said the officials' goals are to diagnose the nature and scope of the budget shortfall, identify causes, assess the need for an independent procedural audit and begin discussion of steps to address the issue.

Finance board officials pointed no fingers. As several said, people cannot help getting ill. But they did ask for detailed documentation of health claims -- including six that exceeded $200,000 and one of almost $600,000. They also asked for changes in reporting methods in an effort to catch potential issues sooner so they can be addressed immediately.

Board of Finance member Tom Lasersohn said information about a sharp increase in underlying medical claims during the 2012-13 fiscal year and the additional increase projected for the current fiscal year was known last March by Segal Consulting, the BOE's benefits, compensation and human resources consulting firm. But, Lasersohn said, that information was not given to the Board of Finance in a timely fashion, which would have allowed that body to address the issue when taking final action on the $104 million school budget or when setting the tax rate.

Brian Stern, the finance panel vice chairman and the audit subcommittee's chairman, suggested a good control system would allow officials to monitor, on a monthly basis, the projected budget, the "actuals" and any a variances.

"There is an issue here in terms of the flow of the information ... something fell through the cracks here ... We are governance for the town's financials and we owe it to make sure that there are processes in place that tell us what is happening, give us early warning of problems ... The point is, how do we improve the process?" Stern said.

To put things into perspective, Stern said the Board of Finance conducts discussions about whether there are more snow storms in a given year than anticipated to decide "as to how we adjust for that in the coming year."

The schools' projected deficit "was four or five times a few winter snow storms. Not only was it we didn't know (about the impending shortfall), it was a big number," Stern said.

Ultimately, town officials will have to work together to try to find a solution to the budget problem. "By the end of the fourth quarter we need to find some way to ensure that we have the cash to cover those claims," Whitney said.

Lasersohn said the issue does not create an immediate cash flow problem for the school system or the town. He said the $681,000 is well within what the town's general fund or general reserves can afford.

Bottom line, health claims will be paid, according to officials.

"This is an internal accounting (issue). Don't worry. The health system is not going to go bankrupt," Stern said.

Big deficit = big tax hike?

Last week, after Landon first told the finance panel about the projected deficit, and said it was the result of errors and nothing illegal, the financiers -- though unpleasantly surprised -- appeared to accept his explanation.

"It sounds to me that you are right," said finance member Tom Lasersohn, who added the information was "a lot to digest."

Whitney said at last week's meeting that, to make matters worse, although the school board's insurance consultant had recommended setting aside a $750,000 contingency fund "that was never included in the budget."

She said that a contingency fund hasn't traditionally been allocated in the education budget, but board members will consider doing so in the future.

Stern asked about the education system's monthly budget reports, and questioned if the errors "shouldn't have popped up prior to Nov. 20."

Landon said it took Longo, a relatively new administrator, a while to research data to come up with the figures.

"This is a big number, not just for the Board of Education but for the town," said Stern. "We are not here to embarrass anybody, we just want to get it right."

"Are you pretty confident this is the right number?" asked finance member Janis Collins. "We have a high degree of confidence that's the shortfall amount," Whitney replied.

She said the school board had a special meeting just prior to last week's finance session and approved hiring an auditor. The cost, however, would be between $35,000 and $65,000 she said.

Whitney said the audit would look specifically at the health insurance accounts to determine the cause of the errors and devise ways to prevent the shortfall from happening again in the future.

Lasersohn said he didn't see the value in hiring an auditor right away, especially if the shortfall is a budgeting problem.

Collins also said it is important to figure out how the projected shortfall in 2013-14 would affect preparations for the next school budget.

Landon said there is a possibility the budget for 2014-15 would include funding to cover "the shortfall, plus whatever we are proposing."

Lasershohn said there could be a "huge increase," adding, "It will be horrible, but we will have to deal with it."