Root Causes of TUSD’s Developing Financial Problems

There are very few choices that everyone will like given the financial situation and educational-performance challenges TUSD now faces. Before discussing solutions, however, I believe the Governing Board needs a much clearer understanding of the root causes of the District’s financial problems.

The financial problem did not develop in one budget year. In my view, it reflects a combination of long-term demographic, enrollment, operating, educational, and management issues that have accumulated over many years.

1. Long-term decline in student enrollment

This is probably the most fundamental financial issue.

Arizona school funding is closely tied to student counts. The Arizona Auditor General has specifically warned that declining enrollment results in reduced funding and that districts experiencing declining student counts together with declining reserves and cash may need to reduce costs promptly.

This is not simply a TUSD issue. Arizona is experiencing broader demographic and enrollment pressures. However, TUSD has had a long period in which enrollment has declined while much of the District’s operating structure remained in place.

When students decline, revenues decline. Buildings, administrators, transportation routes, maintenance requirements, technology systems and many other fixed or semi-fixed costs do not automatically decline with them.

2. District facilities and operating capacity have not declined at the same rate as enrollment

A school district cannot indefinitely operate an infrastructure designed for substantially more students without experiencing financial consequences.

Fewer students should eventually require management to reconsider the number of schools, administrative structures, staffing levels, transportation requirements and other operating costs.

Closing or consolidating schools is understandably difficult for students, parents, employees and neighborhoods. Nevertheless, delaying those decisions does not eliminate the financial consequences. It can simply move those costs into future years.

3. Expenditures have exceeded recurring M&O revenues

The AFR information I have reviewed shows that TUSD spent more in M&O than it generated in M&O revenues in both FY2024 and FY2025.

The M&O fund balance consequently deteriorated substantially.

My preliminary estimate is that the deterioration may have continued during FY2026. We should know much more when the CFO files the FY2026 AFR with the Arizona Department of Education on October 15.

A recurring operating deficit cannot be solved indefinitely by consuming fund balances or moving resources from other purposes.

4. Declining enrollment has not been matched by sufficiently rapid recurring

expenditure reductions

This is the structural-budget problem.

The District ultimately has to align recurring operating expenditures with recurring operating revenues.

The FY2027 budget itself acknowledges an ongoing structural deficit. Management told the Governing Board in June that the District was working to close an approximately $25 million structural deficit by FY2030 and incorporated $6.8 million of permanent administrative reductions into the proposed FY2027 budget.

That is an important acknowledgment, but it also raises the question of why the underlying imbalance was allowed to develop to its present level.

5. Reliance on nonrecurring resources can delay recognition of the underlying problem

The District has had access over the years to temporary or nonrecurring resources, including federal pandemic assistance, one-time State funding, accumulated balances and transfers between funds.

Those resources can be appropriate for their authorized purposes, but they can also make it more difficult for a Governing Board to see the underlying relationship between recurring revenues and recurring operating expenditures.

When temporary funding disappears but the associated expenditures continue, the General Fund must absorb the cost.

6. Capital resources have been redirected to operations

The District has transferred resources from Unrestricted Capital Outlay to M&O.

This may provide short-term operating relief, but transferring resources does not correct the underlying structural deficit. It changes the source of the money being used to finance operations.

The Board should understand the long-term consequences of using resources otherwise available for capital needs to support recurring operations.

7. Educational performance and the District’s competitive position need to be considered

Enrollment decline should not be attributed entirely to demographics.

Parents have alternatives, including charter schools, private schools, homeschooling, neighboring districts and other educational options.

Therefore, the Board should determine how much of TUSD’s enrollment decline results from demographics and how much results from families choosing educational alternatives.

Student achievement is also relevant. Arizona publishes school-level academic achievement and growth information, and TUSD has schools with materially different performance results.

If families perceive that the educational product available elsewhere better meets their children's needs, enrollment can be affected. That makes educational quality not only an academic issue but potentially a financial and strategic risk.

8. The District needs to determine whether its educational delivery model has adapted sufficiently

An organization experiencing a sustained loss of customers cannot respond only by adjusting its annual budget.

It must examine the product and how that product is delivered.

TUSD should be asking whether instructional methods, programs, school configurations, staffing models and management practices have changed sufficiently in response to student outcomes, changing demographics and competition for students.

This is an area where I believe the Board needs facts and analysis rather than assumptions.

9. Management has not adequately connected enrollment trends to their long-term financial consequences for the Board

This is one of my principal governance concerns.

The Board should have been receiving a multi-year analysis connecting:

Demographics → Enrollment/ADM → WSC → State funding → Revenue → Required staffing and facilities → Expenditures → Fund balance → Cash.

Looking at these matters separately makes it difficult to see the developing financial problem.

The Board needs to understand not simply that enrollment is declining, but what each 1%, 3%, 5% or greater decline in ADM/WSC means for future revenue, staffing requirements, facilities utilization, M&O fund balance and cash.

10. Financial planning appears to have been too focused on annual budgets rather than long-term financial sustainability

An adopted budget answers an important question: What are we authorized to spend?

It does not necessarily answer the more important financial-management question: Can we continue spending at this level?

TUSD needs an integrated multi-year financial model incorporating enrollment, WSC, revenues, payroll, benefits, facilities, transportation, capital requirements, liabilities, fund balances and monthly cash flow.

That model should include optimistic, most-likely and adverse scenarios.

The fundamental issue

I believe the Governing Board needs to separate the symptoms from the root causes.

The immediate symptoms are declining fund balance, budget pressure and potentially declining liquidity.

The deeper issues include declining student population, loss of enrollment, excess operating capacity relative to enrollment, recurring expenditures that have not adjusted sufficiently to recurring revenues, reliance on temporary resources, educational-performance challenges, competition for students and inadequate long-term financial planning.

These issues developed over many years. They will not be corrected by one budget adjustment.

When the FY2026 AFR is filed on October 15, I expect to have much better information concerning the magnitude of the FY2026 M&O deterioration. With that information, together with the District’s actual cash balances and monthly cash-flow requirements, I should also be able to develop a more reliable estimate of when TUSD could encounter a serious liquidity problem if the underlying operating imbalance is not corrected.

I believe that information should be provided to the Governing Board so that future decisions about schools, staffing, administration, programs and spending are based on the District’s actual financial trajectory rather than simply the next annual budget.