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Audit hints at future district problems

More and more school districts may be forced to dip into reserves to cope with shrinking funding for schools, the state’s school finance chief and a new state audit warned Tuesday.

Vody Herrmann, assistant commissioner of education, told the Legislative Audit Committee, “I do believe we’ll see an increase in the number of districts” spending down their fund balances to cover operating costs.

Herrmann spoke during a hearing on a new report that tracks the fiscal health of state school districts.

Staff in the state auditor’s office reviewed three years of audits of the state’s 178 school districts, in this case, 2006-07 through 2008-9, and evaluated the financial health of districts based on six warning indicators.

The review found that 19 Colorado school districts showed at least two indicators at the end of the 2008-09 school year. Thirty districts had one indicator. A year ago, the auditor’s 2009 report found 13 districts with two warning indicators and 30 with one. (See story on last year’s report.)

Crystal Dorsey of the state auditor’s staff said those 19 districts “showed signs of potential financial strain” and that “the more indicators a district has the more likely it may be the district is experiencing financial stress.”

The most common indicators among the districts that were flagged involved declining reserves.

Of the 19 districts with two indicators, 15 had an increase from the prior year.

Districts that went from no indicators to two included Brighton, Buena Vista, DeBeque, Durango, Eagle County, La Veta, Roaring Fork, Stratton and Vilas.

Districts that went from one indicator to two included Hayden, Huerfano, Littleton, Manzanola, Platte Valley and Rocky Ford.

Four districts, Hoehne, Lewis Palmer, Pritchett and Gilcrest had two indicators this year and last.

The six indicators

  • General fund liabilities exceed assets
  • Debt payments exceed the revenue dedicated to repayment
  • General fund ending balance would cover less than a week’s operating expenses
  • Declines in reserves
  • Previous deficits being paid off by current revenues
  • Declines in general fund balance

Read the full report (PDF). See Appendix D for financial statistics on all 178 districts.

Eagle, La Veta, Littleton and Rocky Ford reported they were deliberately spending down balances in their general funds, while Durango, Eagle, Huerfano and Stratton reported they had experienced declines in property tax revenues. Seven districts reported that capital spending affected their reserves.

The auditor’s report noted, “Even though there is some indication of spending down reserves, it is not a widespread practice on a consistent basis.”

But, the report continued, “Use of reserves will likely increase in Fiscal Year 2010 through Fiscal Year 2012 due to the state’s economic conditions and the funding reductions being implemented.”

That’s the concern Herrmann echoed in her remarks.

The 2008-09 budget year, the most recent period covered in the auditor’s report, was the last year that state school districts received full state funding according to the Amendment 23 finance formula. Midyear cuts were made in state support for 2009-10, and larger cuts were made for the current 2010-11 budget year.

With some state officials projecting a $1 billion revenue shortfall for 2011-12, K-12 cuts for that year could be as large or larger than those made this year.

That’s a situation that could force more districts to dip into reserves.

The study of district finances is done annually.

Meeting certain financial conditions is part of a district’s accreditation with the state. Herrmann said only one district, Center, currently is on financial watch.

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