First Past at the AFR for FY2026

18 hours ago

4 min read

1. The M&O deficit got worse — despite $16.1 million transferred in does not fix anything!

This is my primary concern.

The operating result improved substantially: the revenue/expenditure gap fell from approximately $23.9 million in FY2025 to $17.1 million in FY2026.

But TUSD then received $16.149 million of transfers into M&O. Even after that temporary cash assistance, M&O ended FY2026 $8.327 million in deficit, compared with $6.064 million negative at June 30, 2025.

The AFR's fund-balance-reserve page makes the situation especially clear. TUSD identifies an FY2026 M&O targeted reserve of $3,807,889, while its actual reserve is $(8,326,741).

Thus M&O is approximately $12.1 million below its own stated target. The same page explicitly identifies the $8.327 million as a fund deficit.

That should be a major governance issue.

2. Where did the $16.149 million transfer into M&O come from?

This now becomes one of the most important questions in the AFR.

FY2025 had no transfers into M&O. FY2026 has:

Fund transfers-in to M&O: $16,148,712

At the same time, the AFR reports exactly $16,148,712 of transfers out of Unrestricted Capital Outlay Fund 610.

That numerical match strongly indicates that the approximately $16.15 million moved from UCO into M&O. The transaction should be traced to the underlying statutory authority and Board authorization before drawing a legal conclusion.

Economically, however, the implication is straightforward:

Without the $16.149 million transfer, M&O's FY2026 operating result

would have been much worse.

The recurring operating structure has therefore not yet reached break-even.

3. M&O expenditures did not decline

This is particularly concerning given TUSD's enrollment decline.

M&O expenditures were:

FY2024: $370.448 million
FY2025: $377.033 million
FY2026: $380.063 million

The FY2026 AFR itself reports the increase from FY2025 as 0.8%.

At the same time, the FY2026 AFR reports Average Daily Membership falling from:

FY2025: 37,145.5700
FY2026: 35,783.9838

That's a decline of approximately 1,362 ADM, or 3.7%.

So we have a basic structural problem:

Enrollment declined approximately 3.7%, while M&O expenditures increased approximately 0.8%.

That is exactly the expenditure/enrollment mismatch we have been looking for.

4. Some operating cost categories increased substantially

The M&O detail provides several areas that deserve explanation.

Most striking is regular-education general administration, which increased from approximately $2.512 million to $3.897 million — 55.1%.

Other increases include:

Special-education instructional-staff support: +42.4%
K–3 Reading: +64.1%
Pupil transportation: +10.5%
Special education overall: +4.7%
Desegregation: +1.6%

Meanwhile regular-education instruction declined 5.4%, from approximately $91.76 million to $86.78 million.

That combination deserves scrutiny: regular classroom instruction declined while several support/administrative categories increased.

5. Classroom Site Fund spending increased 13.6%

Classroom Site Fund expenditures increased:

FY2025: $33.754M
FY2026: $38.337M

That's approximately $4.58 million, or 13.6%. The fund remains financially positive, ending FY2026 with approximately $26.278 million.

This isn't necessarily a problem—the money has designated purposes—but it reinforces why we cannot look only at districtwide cash. TUSD can have substantial positive balances in individual restricted/special-purpose funds while M&O itself is negative.

6. Federal funding fell substantially

This is another important structural issue.

FY2025 federal revenues shown in the AFR totaled approximately $109.692 million in the relevant aggregate column.

FY2026 federal revenue in that comparable aggregate presentation falls to approximately $88.769 million.

That's roughly a $20.9 million reduction.

The detailed FY2026 federal-project schedule reports federal project revenues of approximately $62.036 million and expenditures of $58.496 million, with ending federal-project balances of approximately $10.764 million.

The loss of pandemic-era and other federal support is important because expenditures or staffing originally supported by temporary federal resources can become an M&O problem if the district maintains them after the funding expires.

7. Federal and state project deficits remain

The FY2026 fund-balance schedule reports $(1.954) million of federal/state grant deficits.

That's an improvement from FY2025, when that category showed approximately $(3.120) million, but negative grant balances still warrant reconciliation—particularly whether they represent reimbursement timing or expenditures that ultimately may have to be absorbed elsewhere.

The FY2026 AFR itself cautions that federal-fund transfers are tightly restricted and that transfers between funds should occur only when specifically authorized by statute or permitted by the applicable federal grant.

8. TUSD has lots of fund balance—but much of it cannot solve M&O

This is perhaps the most important point for the public to understand.

The FY2026 AFR reports approximately: Total district ending fund balances: $352.307 million

That sounds enormous.

But approximately $261.546 million is classified as restricted, and another $25.690 million committed. M&O itself is $(8.327) million. The AFR also shows $195.942 million in the Bond Building Fund, which obviously isn't an unrestricted M&O reserve.

So statements such as “TUSD has $352 million in reserves” would be seriously misleading.

The proper question is:

How much unrestricted, legally available recurring financial capacity does TUSD have to support M&O?

That number is dramatically smaller.

9. Employee Benefits Trust deserves continued attention

The FY2026 reserve disclosure reports: Target Employee Benefits Trust reserve: $21.000 millionActual: $19.384 million

That puts the Trust about $1.616 million below TUSD's stated reserve target.

This aligns with the concerns we identified separately in the Employee Benefits Trust analysis concerning claims costs, reserves and the structural relationship between premiums and expenses.

10. The biggest question: what happened between the trial balance and AFR?

This is the item I would put at the top of an Audit Committee request.

Our copy of the June 30 FY2026 trial-balance analysis showed approximately:

M&O revenue: $325.764M
M&O expenditures: $373.233M

The final AFR now reports:

M&O revenue: $362.951
MM&O expenditures: $380.063M

Those are substantial changes.

Revenue increased by approximately $37.2 million between the trial balance we reviewed and the final AFR, while expenditures increased approximately $6.8 million.

Most importantly, our preliminary closing analysis suggested a much larger negative M&O position, whereas the final AFR reports $(8.327) million.

That doesn't establish that anything is wrong—the AFR requires year-end adjustments, accruals, statutory classifications and reconciliation entries—but the bridge between the June 30 trial balance and the final AFR should be documented and understandable.

My overall assessment

There was meaningful improvement in FY2026, and that should be acknowledged. The underlying M&O operating shortfall decreased from approximately $23.9 million to $17.1 million.

But the financial problem was not solved.

The strongest warning signal is:

TUSD entered FY2026 with a negative M&O balance, generated another approximately $17.1 million operating shortfall before transfers, transferred approximately $16.15 million into M&O, and nevertheless finished FY2026 with an $8.33 million M&O deficit.

Meanwhile, ADM declined approximately 3.7% while M&O expenditures increased 0.8%.

For the school-reconfiguration discussion, that tells us something important: TUSD still needs recurring expenditure reductions. Transfers can improve the reported annual result, but they do not by themselves correct a structural mismatch between recurring operating revenues and recurring operating costs.