Stegeman: TUSD must reckon with cash problems

The Tucson Unified School District has cash problems. Unsustainable operating deficits are driving it relentlessly toward a fiscal reckoning. Reports from TUSD’s internal auditor show that longstanding weaknesses in internal controls remain widespread. The Governing Board should embrace its statutory responsibility to address these issues.

TUSD’s annual external audits show that its unrestricted fiscal-year-end cash balances have declined steadily, from $31 million in mid-2016 to less than $11 million in mid-2019. During the same three years it withdrew almost $15 million from the reserves of its self-insurance health trust, a separate entity. TUSD has drawn or plans to draw another $11 million from the health trust reserves by mid-2021. But that pot is now dry: further withdrawals would jeopardize the trust’s solvency.

The $20 million cash decline, even after taking $26 million from the health trust, implies accumulated operating deficits of $46 million over five years, before accounting for changes in the cash balances since mid-2019. (Fiscal year 2019-20 is not yet audited.)

Ongoing desegregation litigation may provide limited relief. The state, if it loses, may eventually cover $8 million of that $46 million.

TUSD’s 2019-21 audited results will probably be grim. Federal pandemic-related subsidies will not cover all pandemic-related expenses. Lower state aid, tracking the current enrollment decline, will increase the pain. The federal pandemic aid protects districts from enrollment losses exceeding 2% – but (unless extended) for one year only.

These trends portend a hard landing for TUSD after 2020-21. With its cash reserves depleted, further spending cuts seem inevitable.

Members of TUSD’s audit committee, and others, have long foreseen this fiscal reckoning. The major bond rating firm Fitch downgraded TUSD’s debt in 2016 and again in 2019, citing its “steady operating deficits” and noting:“district management remains challenged to sustain budget balance.” TUSD’s current rating of BBB+, with a “negative outlook,” is several notches below most (perhaps all) of Arizona’s other major school districts.

Partly because of persistent overspending, I voted against TUSD’s annual budget every year from 2012-2019. The board still lacks three members willing to contest vague and last-minute budgets.

TUSD has also been notorious for weak internal controls over money and property. For years I urged the board to hire an internal auditor, as it finally did in 2017. (One long-time board opponent worried in 2015 that my proposal “could actually create a sort of watchdog.” Well, yes.)

The district’s current internal auditor, appointed last November, has proved the position’s value. In three reports, she has found over 20 problem areas, including violations of statute, policy, or the Uniform System of Financial Records, overdrawn accounts, inadequate separation of duties, inadequate safeguarding of cash, monies not deposited promptly, out-of-date accounting, inadequate training and bonding of employees who handle cash, and incomplete and lost records.

The auditor reported no evidence of fraud or theft, but questionable spending has occurred. Should high school activity funds buy students underwear from Victoria’s Secret, and expensive shoes, and pay travel expenses for students who do not attend TUSD? This all occurred on one trip last year.

Superintendent Gabriel Trujillo may want to fix weak practices. But lower-level administrators and longtime board members typically appear resistive rather than concerned. The entrenched culture reflexively views the audit committee as an adversary and any oversight as an intrusion. 

The board also seems oblivious to TUSD’s budget problems. Last year I saw members leave a board meeting before 8:30, without explanation and without returning, five minutes into a budget study session. This year the board discussed the division of Red-for-Ed money among employee groups, and pandemic-related adjustments, but it spent negligible time discussing any other aspect of TUSD’s spending plans.

TUSD has cash problems. The public should demand that its board pay attention.