TUSD's $58 Million M&O Spending Problem: Why Financial Reserves and Management Accountability Matter
John C. Blackshire, Jr. The Accountware Group | October 28, 2026
Three consecutive years of Maintenance and Operations spending above revenues raise serious questions about Tucson Unified School District's financial sustainability, reserve management, and Governing Board oversight.
TUSD Has a Financial Problem That Cannot Be Solved by Budget Reclassifications
The Tucson Unified School District (TUSD) has spent approximately $58.14 million more in its Maintenance and Operations (M&O) Fund than it received in M&O revenues during fiscal years 2024, 2025, and 2026, before transfers and other financing activities.
This is not a projection. It is based on financial information reported in the district's Annual Financial Reports (AFRs).
The problem is straightforward: TUSD has repeatedly spent more money on operations than it generated in operating revenues.
An organization cannot continue that practice indefinitely without depleting its financial reserves, obtaining additional revenues, reducing expenditures, or relying on other funding sources.
The Arizona Auditor General has already identified financial sustainability concerns at TUSD. The district's financial reporting raises additional questions about whether its management and Governing Board have established an effective plan to restore financial stability.
1. Three Years of M&O Operating Deficits
The following figures summarize TUSD's reported M&O revenues and expenditures for the three fiscal years ending June 30, 2026.
Fiscal Year | M&O Revenues | M&O Expenditures | Operating Deficit |
FY2024 | $353.32 million | $370.45 million | $17.13 million |
FY2025 | $353.13 million | $377.03 million | $23.90 million |
FY2026 | $362.95 million | $380.06 million | $17.11 million |
Total | $1,069.40 million | $1,127.54 million | $58.14 million |
Source: TUSD Annual Financial Reports. Figures represent revenues less expenditures before transfers and other financing sources and uses. Totals are based on rounded annual figures.
The district experienced operating shortfalls in each of these three years.
The largest annual deficit occurred in FY2025, when expenditures exceeded revenues by approximately $23.9 million.
Although the FY2026 deficit was smaller, the district still spent approximately $17.1 million more than it received in M&O revenues.
This is a recurring financial sustainability problem, not simply a one-year budget variance.
It is important to distinguish these operating deficits from violations of Arizona's statutory expenditure limits. Spending more than current-year revenues does not necessarily mean that a district has exceeded its legal spending authority.
However, legal compliance does not establish financial sustainability.
2. TUSD's M&O Fund Balance Has Deteriorated
The district's reported M&O fund balance provides another indication of the financial pressure.
At the end of FY2023, TUSD reported a positive M&O fund balance of approximately $38.05 million.
At the end of FY2026, the reported balance was approximately negative $8.33 million.
That represents a deterioration of approximately $46.38 million over three years.
The change in fund balance does not equal the cumulative $58.14 million operating deficit because transfers, other financing activity, and accounting adjustments also affect the ending balance.
Nevertheless, the deterioration is substantial.
A negative accounting fund balance is not necessarily the same as a negative cash balance.
It does, however, raise important questions about the availability of financial resources and the sustainability of current operations.
The Governing Board should require management to explain exactly how the district moved from a substantial positive M&O fund balance to a negative balance in three fiscal years.
3. Arizona Does Not Require One Specific M&O Reserve Percentage
Arizona does not establish a uniform minimum M&O accounting fund balance percentage for every school district.
Instead, the Arizona Auditor General recommends that districts establish reserve policies appropriate to their financial circumstances.
The Auditor General's fund balance guidance encourages districts to consider their operating risks, revenue stability, expenditure patterns, and financial obligations when determining an appropriate reserve level.
A written, Governing Board-approved reserve policy is recommended, although it is not itself a statewide statutory requirement.
The distinction is important.
The absence of a mandatory statewide percentage does not mean that school district management should operate without a reserve objective.
Responsible financial management requires an organization to determine how much financial flexibility it needs and to establish controls for maintaining that flexibility.
For a district with hundreds of millions of dollars in annual expenditures, reserve management should be an important component of financial planning and Governing Board oversight.
4. How Much Should TUSD Maintain in Financial Reserves?
The Government Finance Officers Association (GFOA) recommends that general-purpose governments maintain unrestricted General Fund reserves of at least two months of regular operating revenues or expenditures, while recognizing that the appropriate amount depends on the government's circumstances. Note: Call the CFO about this organization for a positive reference.
This is a professional benchmark, not an Arizona legal requirement, and the GFOA General
Fund measure is not necessarily identical to Arizona's M&O Fund.
Nevertheless, the benchmark illustrates the financial scale involved.
Using TUSD's approximately $380.06 million in FY2026 M&O expenditures:
Illustrative Reserve Coverage | Amount |
One month | $31.67 million |
Two months | $63.34 million |
Three months | $95.02 million |
Four months | $126.69 million |
A two-month reserve equivalent would be approximately $63.34 million.
This calculation is illustrative. It is not a determination that Arizona law requires TUSD to maintain $63.34 million in its M&O Fund.
The Governing Board should establish a reserve target supported by a documented analysis of the district's financial risks.
That analysis should consider enrollment trends, revenue volatility, payroll obligations, expenditure commitments, liquidity needs, and the potential costs of restructuring school operations.
5. The Arizona Auditor General Has Already Identified Financial Risks
The Arizona Auditor General's January 2026 financial risk assessment identified significant concerns involving TUSD's financial condition.
Among the issues were declining financial reserves, unfavorable operating results, declining enrollment, and increased reliance on capital resources to support operations.
The Auditor General also reported a reduction in TUSD's unused M&O budget capacity.
That measure requires explanation because it is frequently misunderstood.
M&O budget capacity is permission to spend money. It is not money in the bank.
Arizona school districts operate under statutory expenditure limits. The unused difference between authorized M&O spending and actual expenditures can provide future budget flexibility under applicable state rules.
However, a district may have unused expenditure authority while lacking sufficient revenues or accumulated financial resources to support additional spending.
The Auditor General's findings therefore highlight two different concerns:
TUSD's financial reserves have deteriorated.
Its unused statutory M&O budget capacity has declined.
Neither problem should be ignored simply because the district remains within its legal expenditure limits.
The Auditor General's assessment did not conclude that TUSD had exceeded its statutory budget limits or available cash resources during the period examined.
That distinction should be preserved when discussing the district's financial condition.
6. The New M&O Override Does Not Eliminate the Need for Spending Controls
TUSD's FY2027 budget includes revenue from the voter-approved M&O override.
The override provides an additional local property-tax funding source for authorized operating purposes.
However, additional revenue does not automatically correct a structural operating deficit.
An important question is whether the override is financing additional educational services or whether expenditures previously supported by regular M&O revenues are being moved to the override.
Moving an expenditure from one funding source to another does not reduce the expenditure.
For example, if a $5 million annual operating expense is transferred from regular M&O funding to the override, the district still incurs the same $5 million expense.
The transfer may relieve pressure on the regular M&O Fund, but it does not constitute $5 million in districtwide operating savings.
The Governing Board should require management to separately identify:
Actual reductions in recurring expenditures.
Additional recurring revenues.
Expenditures transferred between funding sources.
One-time revenues or transfers used to support operations.
Changes in available financial reserves.
Without this information, taxpayers cannot determine whether TUSD is improving its overall financial condition or merely changing how existing expenditures are financed.
7. School Consolidation Must Be Evaluated Against the Financial Problem
TUSD's declining enrollment and school utilization have become central issues in the district's financial planning.
School consolidation may provide opportunities to reduce facility, administrative, maintenance, and other operating expenditures.
However, closing a school does not automatically produce savings equal to its entire operating budget.
Students generally must be accommodated at other schools, and many instructional and transportation costs continue.
Management should therefore calculate the actual recurring net savings associated with each proposed closure.
Those calculations should include employee costs, facility operating costs, transportation changes, receiving-school costs, transition expenditures, and any continuing property obligations.
The public should also be able to compare those savings with the district's recurring operating deficit.
A school consolidation plan that saves several million dollars annually may contribute to financial recovery, but its effectiveness must be evaluated against the full size of the financial problem.
8. Management Owns the Internal Control Framework
One of the most important governance principles is that management is responsible for establishing and maintaining an effective system of internal control.
This responsibility does not belong primarily to the Internal Auditor or the Audit Committee.
The superintendent and financial management are responsible for identifying financial risks, maintaining reliable financial reporting, monitoring operations, and recommending corrective actions.
The Governing Board is responsible for oversight.
The Audit Committee provides an additional mechanism for examining financial reporting, internal controls, audit findings, and management's corrective actions.
The U.S. Government Accountability Office's Standards for Internal Control in the Federal Government, commonly called the Green Book, provides a useful framework for evaluating these responsibilities.
Although the Green Book does not automatically apply in its entirety to every Arizona school district, its principles are relevant to public-sector governance.
These include management's responsibility to identify and analyze risks, use reliable information, monitor internal controls, and remediate deficiencies.
A district experiencing three consecutive years of operating deficits should have documented processes for identifying the underlying causes and evaluating corrective measures.
The Governing Board should not have to discover significant financial problems by independently analyzing published financial statements.
Management should proactively report material financial risks and explain the proposed response.
9. What the Governing Board and Audit Committee Should Demand
TUSD's financial condition warrants a documented recovery plan supported by measurable objectives.
At a minimum, management should provide the following:
A complete M&O fund balance reconciliation. The reconciliation should cover FY2023 through FY2026 and identify revenues, expenditures, transfers, adjustments, and ending balances.
A formal financial reserve policy. The Governing Board should establish a documented reserve target appropriate to TUSD's financial risks and operating requirements.
A multiyear reserve restoration plan. Management should identify when the district expects to return to its reserve target and the recurring financial improvements needed to accomplish that objective.
A recurring operating budget analysis. The district should distinguish recurring revenues and expenditures from one-time funding, accounting adjustments, and interfund transfers.
Quarterly financial performance reporting. The Governing Board and Audit Committee should receive information comparing actual results with the recovery plan, including explanations for significant deviations.
Independent review of corrective actions. Internal Audit should evaluate the design and implementation of relevant financial controls, subject to its approved mandate and independence requirements.
These actions would allow the Governing Board and the public to measure progress rather than relying exclusively on management's statements about future improvements.
10. The Fundamental Question: When Will TUSD Stop Spending More Than It Receives?
The financial information presents a clear pattern.
TUSD reported approximately $17.13 million in M&O operating deficits in FY2024, $23.90 million in FY2025, and $17.11 million in FY2026.
The cumulative three-year shortfall was approximately $58.14 million before transfers.
During this period, the reported M&O fund balance deteriorated substantially.
The district now has additional override revenue and is considering operational restructuring, including school consolidation.
Those actions may improve its financial position. Their effectiveness, however, must be demonstrated through actual financial results.
The central questions for TUSD leadership are straightforward:
When will recurring M&O revenues consistently cover recurring M&O expenditures?
What financial reserve target has the Governing Board established, and when will the district reach it?
How much of the projected improvement will come from genuine expenditure reductions rather than transfers between funding sources?
Who is responsible for reporting progress and explaining missed financial targets?
These questions should have documented answers.
TUSD's financial condition affects students, employees, taxpayers, and the long-term availability of educational services.
Financial accountability requires more than compliance with statutory spending limits. It requires maintaining sustainable operations, adequate financial flexibility, transparent reporting, and effective management oversight.
The district's leadership should be judged against documented financial objectives and measurable results. The public deserves to know whether the corrective actions are sufficient to reverse the deterioration reflected in TUSD's financial statements.
Sources and references
Tucson Unified School District, Annual Financial Reports, FY2024, FY2025, and FY2026.
Arizona Auditor General, TUSD Financial Risk Assessment, January 2026: https://frisk.azauditor.gov/District/Tucson_Unified_School_District
Arizona Auditor General, Fund Balance Reserve Reporting: https://www.azauditor.gov/fund-balance-reserve-reporting
Arizona Auditor General, Uniform System of Financial Records: https://www.azauditor.gov/usfr
Government Finance Officers Association, Fund Balance Guidelines for the General Fund: https://www.gfoa.org/materials/fund-balance-guidelines-for-the-general-fund
U.S. Government Accountability Office, Standards for Internal Control in the Federal Government (Green Book).
Arizona Revised Statutes §15-943.01, M&O Budget Balance: https://www.azleg.gov/ars/15/00943-01.htm
Editorial note: The M&O operating figures and fund balances in this article are drawn from the supplied “M&O Spending” analysis, which attributes them to TUSD's Annual Financial Reports. The original AFR schedules should be reconciled before publication, particularly the classification of revenues, transfers, and the negative FY2026 ending fund balance.
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