How Much Money Should an Arizona School District Keep in Reserve? What TUSD's Financial Position Reveals

Arizona's M&O Budget Reserves, General Fund Operating Reserves, and Why Tucson Unified May Need $66 Million to $99 Million in Financial Protection

John C. Blackshire, Jr. The Accountware Group (TAG) | Public School Finance, Financial Risk, and Governing Board Accountability

How much money should a public school district maintain in financial reserves?

The TUSD CFO appeared at the TUSD Audit Committee meeting on October 21, 2026. He clearly appears based on his presentation to not understand that the Auditor General has clearly stated the reserve balances need to recover to acceptable levels. He does not understand the school district cannot spend all the revenue being created within the M&O and General Funds.

Should a district with declining enrollment continue spending down its accumulated reserves to maintain existing operations?

And how much financial protection should a school district the size of Tucson Unified School District (TUSD) maintain to protect students, employees, taxpayers and the Pima County Treasurer?

These questions have become increasingly important as Arizona school districts confront declining enrollment, rising operating costs, and limitations on their ability to increase spending.

The Arizona Auditor General's January 2026 School District Financial Risk Analysis identified TUSD as among Arizona's highest-risk school districts.

The Auditor General specifically identified declining student counts, shrinking budget limit reserves, negative General Fund operating margins, declining fund balances, and the redirection of capital funding to operations.

These problems are connected.

When a district consistently spends more than it receives, its financial reserves decline. As reserves decline, management has less flexibility to respond to unexpected financial problems or further enrollment losses.

Eventually, the district must reduce expenditures, increase legally available revenue, or face the possibility of cash deficits and budgetary overspending.

The central question is whether TUSD is maintaining reserves appropriate for its financial risks.

1. Does Arizona Require School Districts to Maintain a Minimum Reserve?

Arizona does not establish one universal minimum General Fund reserve percentage that

every school district must maintain.

The Arizona Auditor General specifically states that districts should evaluate their individual circumstances and risks when determining an appropriate reserve amount.

The Auditor General also recommends that districts adopt a Governing Board-approved reserve policy, although such a policy is not universally required.

This distinction matters.

A district with a reserve below two months of operating expenditures has not necessarily violated state law.

However, it may face significant financial risk.

For its January 2026 financial-risk analysis, the Auditor General incorporated a benchmark of at least two months of General Fund expenditures, consistent with Government Finance Officers Association guidance.

For a district experiencing persistent enrollment declines and operating deficits, two months should be viewed as a prudent minimum planning benchmark rather than an automatic guarantee of financial stability.

2. Arizona Uses Two Different Types of Operating Reserves

An important distinction in Arizona school finance is the difference between the Maintenance and Operations budget limit reserve and the General Fund operating reserve.

They are not interchangeable.

Maintenance and Operations budget limit reserve

The M&O budget limit reserve represents unused expenditure authority under Arizona's school district budgeting system.

It generally reflects the difference between the applicable operating budget limit and actual expenditures, subject to the statutory calculation.

This reserve may increase future spending authority under applicable Arizona law.

However, unused budget authority is not necessarily cash available to spend.

A district could have unused expenditure authority without sufficient financial resources to fund the spending.

General Fund operating reserve

The General Fund operating reserve reflects the financial resources retained in the district's General Fund.

The Arizona Auditor General measures the operating reserve ratio by comparing the General Fund balance with annual General Fund expenditures.

This measure provides insight into how long the district could continue operating at a comparable expenditure level if additional revenues were unavailable.

A district with a 16.67% operating reserve has approximately two months of annual expenditures represented in its reserve.

These two measures answer different questions.

The M&O budget limit reserve addresses legal spending capacity.

The General Fund operating reserve addresses financial resources available for future operations, subject to restrictions and actual liquidity.

Neither measure should be confused with unrestricted cash in a bank account.

3. What Does Arizona Consider an Appropriate General Fund Reserve?

The Government Finance Officers Association recommends that governments maintain unrestricted General Fund balances of no less than two months of regular General Fund operating revenues or expenditures, while evaluating whether additional reserves are necessary.

Arizona's Auditor General has incorporated the two-month concept into its financial-risk methodology.

For a school district facing significant financial uncertainty, a higher reserve may be appropriate.

For purposes of evaluating TUSD, three benchmarks are useful:

Reserve benchmark	Percentage of annual expenditures	Approximate operating coverage
Two months	16.67%	2 months
Three months	25.00%	3 months
Four months	33.33%	4 months

The two-month benchmark is supported by recognized governmental finance guidance.

The three- and four-month levels are additional planning scenarios, not Arizona statutory requirements.

For a district with sustained enrollment losses, negative operating margins, and uncertainty about future funding, a three-month reserve may be a reasonable medium-term policy objective.

4. How Much Should TUSD Maintain in General Fund Reserves?

The Arizona Auditor General's January 2026 analysis reports the following FY2025 General Fund information for TUSD:

Annual General Fund expenditures: $395,810,045

Ending General Fund reserve balance: $38,623,195

Operating reserve ratio: 9.76%

Using the Auditor General's reported expenditure base, the reserve calculations are:

Reserve target	Estimated amount	Gap compared with FY2025 reserve
One month	$32.98 million	No shortfall
Two months	$65.97 million	$27.35 million
Three months	$98.95 million	$60.33 million
Four months	$131.94 million	$93.31 million

These calculations use FY2025 expenditure levels as a consistent baseline. They are not a verified FY2026 or FY2027 ending balance forecast.

The important conclusion

TUSD would have needed approximately $66 million in General Fund reserves to meet a two-month benchmark using FY2025 expenditures.

A three-month target would have required approximately $99 million.

At the reported FY2025 reserve balance of $38.62 million, TUSD had approximately 1.17 months of expenditure coverage.

That leaves the district with substantially less financial protection than the two-month benchmark.

5. TUSD's General Fund Reserve Declined Dramatically

The Arizona Auditor General reports that TUSD's General Fund operating reserve ratio declined sharply between FY2024 and FY2025.

Financial measure	FY2024 audited	FY2025 unaudited
General Fund reserve balance	$88.71 million	$38.62 million
General Fund expenditures	$412.39 million	$395.81 million
Operating reserve ratio	21.51%	9.76%
Months of expenditure coverage	2.58	1.17

The reported reserve balance fell by approximately $50.09 million.

However, the Auditor General's separate General Fund change-in-fund-balance measure reports a decline of $28.26 million, or 42.25%, between FY2024 and FY2025.

These figures should not automatically be treated as equivalent because the Auditor

General's measures use different reporting comparisons and calculations.

A complete reconciliation should be obtained before attributing the entire difference to operating losses.

Nevertheless, both measures indicate a significant deterioration in TUSD's financial position.

The district entered FY2026 with considerably less reserve protection than it had entering FY2025.

6. What Is Happening to TUSD's M&O Budget Limit Reserve?

TUSD's M&O budget limit reserve has also declined.

The Arizona Auditor General reports:

Fiscal year	M&O budget limit	M&O expenditures	M&O budget limit reserve
FY2021	$316.47 million	$293.60 million	$22.87 million
FY2022	$339.06 million	$313.27 million	$25.79 million
FY2023	$371.61 million	$333.43 million	$38.18 million
FY2024	$402.89 million	$370.45 million	$32.44 million
FY2025	$401.31 million	$377.03 million	$24.27 million

The M&O budget limit reserve peaked at approximately $38.18 million in FY2023.

By FY2025, it had declined to approximately $24.27 million.

That represents a reduction of approximately $13.91 million, or 36.43%, from FY2023.

The decline is important because TUSD's student enrollment and weighted student count have also been falling.

As student counts decline, the district's state-formula-generated spending limits and revenues can decline.

The district may therefore lose both current-year funding and accumulated flexibility.

What should TUSD's M&O reserve target be?

Unlike the General Fund operating reserve, the M&O budget limit reserve does not have a widely applicable two-month cash-reserve benchmark.

It should not be calculated as though it were cash.

However, TUSD's historical reserve levels provide useful management targets.

A reasonable recovery objective would be to restore its M&O budget limit reserve toward its FY2023 level of approximately $38 million, provided that the reserve is legally available and supported by actual funding resources.

Compared with the FY2025 reserve of $24.27 million, that would require rebuilding approximately $13.91 million in unused budget authority.

This is a proposed management objective, not a state-mandated minimum.

7. Why Declining Enrollment Makes Reserves More Important

TUSD's financial problem cannot be evaluated without considering student enrollment.

Arizona's school funding system relies heavily on student counts and weighted student counts.

When enrollment declines, state-formula-generated revenues and budget limits may decline.

However, many school district expenditures do not decline at the same rate.

A district may lose 5% of its students without being able to reduce its building costs, transportation costs, administrative structure, or staffing expenditures by 5% immediately.

This creates a structural financial problem.

Revenue declines while significant operating costs remain.

If management does not adjust the cost structure, the district may use accumulated reserves to cover the difference.

That approach can provide temporary flexibility.

But reserves are not a recurring revenue source.

They cannot permanently finance an operating structure that costs more than the district receives.

8. TUSD's Operating Deficit Is a Major Warning Sign

The Auditor General's January 2026 analysis reports:

FY2025 General Fund revenues: $362,222,279

FY2025 General Fund expenditures: $395,810,045

The difference was approximately: $33.59 million more in expenditures than revenues.

This produced a reported operating margin ratio of negative 9.27%.

A negative operating margin indicates that current-year expenditures exceeded current-year revenues under the measure's methodology.

For a district already holding less than two months of reserves, continued operating deficits are particularly concerning.

A district cannot rebuild reserves while repeatedly spending more than it receives, unless other lawful financial resources or transfers offset those deficits.

The first priority must therefore be to establish a sustainable operating budget.

9. The M&O Override Is Not the Same as a Financial Reserve

TUSD voters approved a 15% Maintenance and Operations override in November 2025.

The district's election materials estimated approximately $45.03 million in additional annual operating budget capacity and related local property-tax funding for FY2027.

This additional revenue is important.

However, the override should not be confused with an accumulated financial reserve.

The override represents voter-authorized local property-tax support for eligible operating expenditures.

It can help finance district operations.

It does not automatically create a General Fund reserve.

If the district spends all additional override revenue, its ending reserves may not increase.

Similarly, when TUSD moved expenditures from regular M&O funding to override funding, the change represents a shift in financing sources.

It does not necessarily mean that total expenditures have declined.

The key financial question

Is TUSD using the override to create sustainable financial stability, or is it primarily using the new property-tax revenue to maintain existing expenditures that regular formula funding can no longer support?

This question deserves detailed public reporting.

The Governing Board should require management to explain how the override affects operating deficits, ending fund balances, staffing, and reserve recovery.

10. TUSD Is Also Redirecting Capital Funding to Operations

The Auditor General identified another financial concern.

TUSD redirected approximately $10 million of capital funding to operational spending in FY2025 and planned the same amount for FY2026.

For FY2026, the redirected amount represented approximately 45.15% of the capital monies included in the Auditor General's measure.

This practice may be permitted within Arizona's applicable budgeting framework.

However, the Auditor General warns that redirecting substantial capital resources to operations can increase financial risk.

Money used to support current operations is unavailable for the capital needs it otherwise could have financed.

A district facing aging facilities, deferred maintenance, technology replacement needs, and potential school consolidation costs must evaluate the long-term consequences.

Using capital resources to support recurring operating costs is another indication that management should closely examine whether the district's cost structure is sustainable.

11. What Reserve Policy Should TUSD Adopt?

TUSD should consider a formal, Governing Board-approved financial reserve policy.

The policy should distinguish between the General Fund operating reserve, M&O budget limit reserve, available cash, restricted fund balances, and capital reserves.

For the General Fund, the Board could adopt a two-month minimum target and a three-month long-term goal, with additional analysis to determine whether a higher target is warranted.

Using FY2025 expenditures, those targets would be approximately $66 million and $99 million.

For the M&O budget limit reserve, the Board should establish a separate target based on the district's legal spending authority, enrollment volatility, and historical expenditure patterns.

Restoring the reserve toward its FY2023 level of approximately $38 million would provide a measurable recovery objective.

The Board should also require management to present a multiyear plan for rebuilding reserves without relying on recurring operating deficits.

A proposed TUSD reserve framework

Financial measure	Suggested target	Rationale
General Fund reserve — minimum	$66 million	Approximately two months of FY2025 expenditures
General Fund reserve — long-term	$99 million	Approximately three months of FY2025 expenditures
M&O budget limit reserve	$38 million	Approximate restoration to FY2023 level
Operating margin	At least break-even	Prevent further depletion of reserves
Capital reserves	Separately determined	Protect future capital requirements

The amounts should be recalculated annually using current expenditure levels, projected enrollment, cash flow, and the district's financial risk assessment.

These are recommended management targets, not legal minimums imposed by Arizona.

12. What Should the Superintendent and CFO Report to the Governing Board?

TUSD's Superintendent and CFO are responsible for managing the district's financial resources and maintaining an effective internal control framework.

The Governing Board should receive regular financial reporting sufficient to understand the district's reserve position and emerging financial risks.

A useful monthly financial dashboard should include:

• General Fund beginning and ending balances.

• Actual and projected operating revenues and expenditures.

• M&O budget limit and remaining spending authority.

• General Fund operating reserve ratio.

• Months of expenditure coverage.

• Cash balances and projected monthly cash flow.

• Student enrollment and weighted student count trends.

• Override revenues and related expenditures.

• Capital funds redirected to operations.

• Forecast reserve balances under alternative enrollment and spending scenarios.

The dashboard should clearly distinguish audited actuals, unaudited actuals, adopted budgets, revised budgets, and forecasts.

Management should not wait for individual Board members to request this information.

An effective governance process requires management to proactively identify and communicate significant financial risks.

13. What Is the Audit Committee's Responsibility?

The Audit Committee should help the Governing Board evaluate the reliability of financial reporting, internal controls, and the district's processes for identifying financial risks.

The Committee should understand how management calculates and reports reserve balances.

It should examine the reconciliation among financial statements, annual financial reports, budget documents, and cash balances.

The Committee should also consider whether management's reserve forecasts incorporate realistic enrollment assumptions and expenditure reductions.

Internal Audit can evaluate the design and effectiveness of the district's financial reporting and forecasting controls.

However, management remains responsible for preparing financial forecasts, recommending budgets, and developing corrective action plans.

The Audit Committee's role is oversight, not taking ownership of management's financial decisions.

14. Five Questions TUSD's Governing Board Should Ask Immediately

First: What were TUSD's actual General Fund and M&O budget limit reserves at June 30, 2026?

The FY2026 Annual Financial Report should provide information needed to update the historical analysis.

Second: What are the projected reserve balances at June 30, 2027?

Management should provide forecasts based on realistic enrollment and spending assumptions.

Third: How much of the new M&O override will improve financial stability rather than simply finance existing expenditures?

The Board should require a transparent reconciliation of funding-source changes.

Fourth: What expenditure reductions are necessary to eliminate recurring operating deficits?

Management should present a multiyear financial plan with measurable actions and responsible owners.

Fifth: When will TUSD restore at least two months of General Fund operating reserves?

The Board should establish a target and require management to report progress.

These questions are essential to responsible financial oversight.

15. What Happens If TUSD Does Not Rebuild Its Reserves?

A district that continues to spend down reserves becomes increasingly vulnerable to financial shocks.

Additional enrollment declines may reduce state-formula funding.

Unexpected expenditures may require emergency budget changes.

Capital needs may be deferred.

The district may have less flexibility to manage cash flow.

Eventually, more severe expenditure reductions may become unavoidable.

The Arizona Auditor General monitors school districts for risks involving budgetary overspending and cash deficits.

Districts experiencing severe budgetary problems may face additional oversight, including potential receivership under applicable Arizona law.

TUSD was not reported to be in receivership in the January 2026 analysis.

However, its classification among the highest-risk districts demonstrates why the Governing Board should prioritize reserve recovery and structural financial stability.

Conclusion: TUSD Should Maintain Approximately $66 Million to $99 Million in General Fund Reserves

Arizona does not mandate a single fixed reserve percentage for all school districts.

Nevertheless, the Arizona Auditor General's financial-risk methodology recognizes the importance of maintaining approximately two months of General Fund operating reserves.

For TUSD, using FY2025 expenditures, that translates into approximately $66 million.

A three-month reserve would require approximately $99 million.

TUSD's reported FY2025 General Fund reserve of $38.62 million was substantially below both benchmarks.

Its M&O budget limit reserve had also declined from $38.18 million in FY2023 to $24.27 million in FY2025.

These developments are especially concerning because the district is experiencing declining enrollment, operating deficits, and increased reliance on alternative funding sources.

The voter-approved M&O override may provide significant additional operating revenue, but it cannot substitute for a sustainable cost structure and effective reserve management.

I recommend that TUSD adopt a Governing Board-approved reserve policy, establish a minimum two-month General Fund reserve target, develop a longer-term three-month objective, and separately rebuild its M&O budget limit reserve.

The Superintendent and CFO should provide monthly financial reporting and a multiyear reserve recovery plan.

The Audit Committee should evaluate the reliability of the financial information and the effectiveness of the controls supporting it.

Ultimately, financial reserves are not idle resources.

They provide the financial flexibility necessary to protect educational programs, employees, and taxpayers when financial conditions deteriorate.

A district that continually consumes its reserves to support recurring expenditures is postponing financial decisions, not solving its underlying financial problems.

Sources and Further Reading

Arizona Auditor General — Tucson Unified School District Financial Risk Analysis, January 2026

Arizona Auditor General — School District Financial Risk Analysis Overview

Arizona Auditor General — School District Fund Balance Reserve FAQs

Arizona Revised Statutes — A.R.S. §15-943.01, Maintenance and Operation Budget Balance

Government Finance Officers Association — Fund Balance Guidelines for the General Fund

The Accountware Group provides research and analysis on public-sector financial management, internal controls, corporate governance, and Audit Committee oversight.