TUSD's Annual Financial Reports Reveal Serious Financial and Governance Questions: Who Is Watching the District's Money?
John C. Blackshire, Jr. The Accountware Group | Financial Accountability, Internal Controls, and Public School Governance
October 21, 2026
Four Years of Financial Reports Tell a Troubling Story
Every year, Arizona public school districts are required to submit an Annual Financial Report (AFR) to the Arizona Department of Education (ADE) by October 15. These reports provide an important accounting of how school districts receive, spend, and manage public funds.
The Annual Financial Report is not simply another government filing. It is a fundamental financial accountability document that should provide the Governing Board, taxpayers, parents, employees, and other stakeholders with reliable information about the financial condition of their school district.
I did a high level review of the Annual Financial Reports submitted by Tucson Unified School District (TUSD) for fiscal years 2023 through 2026. Ricardo “Ricky” Hernández became Chief Financial Officer of Tucson Unified School District (TUSD) in April 2022 and has been responsible for all of these filings.
The analysis identifies several significant financial conditions and reporting questions that deserve immediate attention from TUSD management, its Governing Board, and its Audit Committee. I have communicated a summary of the issues to TUSD Management and the Audit Committee today.
Among the findings:
TUSD's Maintenance and Operation (M&O) Fund balance deteriorated by approximately $46.37 million between FY2023 and FY2026.
M&O expenditures exceeded revenues in each of the last three fiscal years.
The FY2026 AFR reports approximately $16.15 million transferred into the M&O Fund.
The FY2026 beginning M&O fund balance differs from the FY2025 ending balance by $361,018.
General administration expenditures increased 55.1% in FY2026 while regular education instruction expenditures declined 5.4%.
Federal revenues reported in the all-other-funds category declined approximately $20.92 million between FY2025 and FY2026.
These findings do not establish that TUSD has committed fraud or intentionally misstated its financial reports. They do, however, identify financial risks, reporting inconsistencies, and potential internal control deficiencies that warrant documented explanations.
The larger question is whether TUSD's financial reporting and governance processes are functioning as they should.
1. TUSD Has Experienced a $46 Million Deterioration in Its Operating Fund Balance
The most significant financial condition identified in the four-year analysis is the deterioration of TUSD's Maintenance and Operation Fund.
The M&O Fund supports the district's recurring operations, including instructional programs, administrative functions, student support, and facilities operations.
The AFRs report the following ending M&O fund balances:
Fiscal year | Ending M&O fund balance |
FY2023 | $38,046,230 |
FY2024 | $19,389,869 |
FY2025 | ($6,064,372) |
FY2026 | ($8,326,741) |
Over three years, TUSD moved from a positive $38.05 million fund balance to a negative $8.33 million balance.
That represents a deterioration of approximately $46.37 million.
This is not a minor budget variance. It is a substantial multiyear change in the district's reported operating financial position.
A properly functioning financial management process should identify trends of this magnitude and provide the Governing Board with timely explanations, forecasts, and corrective action alternatives.
The key questions are straightforward:
When did management first determine that the M&O Fund was approaching a negative balance?
What financial forecasts were provided to the Governing Board?
What corrective actions were recommended?
Were the financial implications of declining enrollment adequately incorporated into those forecasts?
TUSD's enrollment trends make these questions especially important because Arizona's school funding system is significantly influenced by student counts.
A school district cannot indefinitely maintain an expenditure structure that exceeds its recurring financial resources.
2. TUSD's Recurring M&O Expenditures Exceed Revenues
The AFRs reveal another significant issue: expenditures have exceeded revenues in the M&O Fund for three consecutive fiscal years.
Fiscal year | M&O revenues | M&O expenditures | Shortfall |
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 |
These comparisons exclude transfers and other financing sources or uses.
Over these three years, the cumulative difference between M&O expenditures and revenues was approximately $58.14 million.
This pattern raises a fundamental question about the district's financial sustainability.
Is TUSD operating with a structural financial imbalance?
A structural imbalance exists when an organization's ongoing expenditure commitments exceed the revenues reasonably expected to support those commitments.
Such an imbalance cannot be permanently corrected through accounting adjustments, transfers between funds, or the temporary use of accumulated financial resources.
It requires management to address the underlying relationship between revenues and expenditures.
The Governing Board should require management to provide a multiyear financial forecast showing how TUSD intends to bring recurring expenditures into alignment with recurring revenues.
3. Why Did TUSD Transfer $16.15 Million Into the M&O Fund?
The FY2026 AFR reports approximately $16.15 million in transfers into the Maintenance and Operation Fund.
The same report identifies approximately $16.15 million in transfers out of the Unrestricted Capital Outlay Fund.
The corresponding amounts indicate that the transfers should be traced through the district's accounting records to establish their exact source, destination, and purpose.
The critical issue is whether TUSD is using transfers to address recurring operating shortfalls.
Transfers between funds may be authorized under applicable Arizona school finance requirements. Their presence does not automatically indicate improper accounting or financial management.
However, a transfer is not the same thing as new recurring operating revenue.
If the district must repeatedly transfer resources into M&O to finance ongoing operations, management should explain whether those transfers are sustainable and what alternatives are available.
The Governing Board and Audit Committee should request the legal authority, accounting documentation, and approvals supporting the FY2026 transfers.
4. Why Do the Beginning and Ending Fund Balances Not Agree?
One of the most direct financial reporting questions involves the relationship between the FY2025 ending M&O fund balance and the FY2026 beginning balance.
The FY2025 AFR reports an ending balance of negative $6,064,372.
The FY2026 AFR reports a beginning balance of negative $5,703,354.
That is a difference of $361,018.
Under normal financial reporting procedures, the prior year's ending fund balance should reconcile to the following year's beginning fund balance.
Differences may be legitimate when they result from audit adjustments, corrections of prior-period errors, or other properly documented accounting changes.
But they must be explained.
The district should provide a reconciliation identifying every adjustment responsible for the $361,018 difference, together with supporting journal entries and evidence of review and authorization.
This is a basic financial reporting control.
An organization responsible for hundreds of millions of dollars should have procedures to ensure that the opening balances used in its financial reports are reconciled to the prior year's closing balances.
The difference does not, by itself, establish a material misstatement. It does establish a specific reconciliation question that management should be able to answer.
5. Administrative Spending Increased While Regular Instruction Spending Declined
The FY2026 AFR reports substantial changes in two important expenditure categories.
General administration expenditures increased from approximately $2.51 million in FY2025 to $3.90 million in FY2026.
That represents a 55.1% increase.
During the same period, regular education instruction expenditures declined from approximately $91.76 million to $86.78 million.
That represents a 5.4% decrease.
These changes deserve examination.
There may be legitimate reasons for the differences, including staffing changes, accounting reclassifications, changes in contracted services, or shifts in funding sources.
However, the Governing Board should not have to discover significant expenditure trends by independently analyzing annual regulatory filings.
Management should proactively explain changes of this magnitude.
The important question is whether these expenditure patterns are consistent with the district's educational priorities and financial sustainability plan.
6. Significant Budget Variances Raise Questions About Financial Planning
The FY2026 AFR also identifies substantial differences between budgeted and actual expenditures.
Regular education instruction expenditures were approximately $14.39 million below budget.
Special education expenditures were approximately $8.06 million above budget.
These variances are significant enough to warrant detailed explanations.
Were the differences caused by staffing vacancies, changes in student needs, inaccurate budget assumptions, expenditure classification changes, or other operational factors?
A budget is a financial management tool, not merely a document adopted to comply with statutory requirements.
Management should use budget-to-actual reporting throughout the fiscal year to identify unexpected trends and recommend corrective actions.
The Governing Board should receive timely information about significant variances, their causes, and their anticipated financial consequences.
7. Federal Revenues Declined by Nearly $21 Million
The AFRs report that federal revenues in the all-other-funds category declined from approximately $109.69 million in FY2025 to $88.77 million in FY2026.
That is a decrease of approximately $20.92 million, or 19.1%.
The reduction may reflect the expiration of temporary federal programs, differences in grant reimbursement timing, or changes in available funding.
The AFR figures alone do not establish which factors caused the decline.
The financial management concern is whether TUSD has continued expenditures previously financed with federal resources after those resources became unavailable.
If personnel, programs, or other recurring costs were shifted into locally financed funds, management should disclose the financial consequences.
This is particularly important when the M&O Fund is already reporting a negative balance.
8. Desegregation Spending Continues to Increase
TUSD's desegregation expenditures have remained substantial.
Fiscal year | Desegregation expenditures |
FY2023 | $60.13 million |
FY2024 | $61.44 million |
FY2025 | $62.32 million |
FY2026 | $63.34 million |
The four-year increase is approximately $3.22 million.
The appropriate oversight question is not simply whether TUSD is spending money on desegregation activities.
It is whether the district can demonstrate that the expenditures are properly classified, authorized, and connected to their intended educational objectives.
The Governing Board should receive clear information about program expenditures, staffing, school-level allocations, and performance outcomes.
Public accountability requires more than demonstrating that money was spent. It requires explaining what the expenditure was intended to accomplish and how management evaluates the results.
9. The FY2027 M&O Override Must Be Evaluated as a New Funding Source
TUSD's FY2027 budget introduces an additional issue that should be evaluated alongside the historical AFR results.
The district's M&O override represents locally approved property-tax revenue that supports district operations.
When management shifts expenditures from the regular M&O funding structure into the override, that is not merely an accounting reclassification.
It changes the funding source supporting those expenditures.
The distinction matters because the regular M&O funding structure is influenced by Arizona's school finance formulas and student enrollment, while override revenue depends on voter authorization and the applicable property-tax structure.
A shift in funding source does not necessarily mean that districtwide expenditures have been reduced.
The Governing Board should therefore require management to reconcile the FY2026 actual expenditures with the FY2027 budget by program and funding source.
The analysis should distinguish actual expenditure reductions from expenditures that continue but are financed through the override.
Otherwise, stakeholders may incorrectly interpret a reduction in one funding category as an overall reduction in spending.
10. Who Is Responsible for the Accuracy of TUSD's Annual Financial Reports?
The answer is management.
The Superintendent and Chief Financial Officer are responsible for establishing and maintaining appropriate financial reporting processes and internal controls.
The Governing Board provides oversight, while the Audit Committee should support that oversight through independent examination of financial reporting risks and internal control matters.
An Audit Committee does not prepare the district's financial statements. It does not maintain the accounting records or assume management's operational responsibilities.
However, an effective Audit Committee should receive sufficient information to evaluate significant financial reporting risks and challenge management when necessary.
The GAO Green Book provides a useful framework for this discussion.
Its principles address the control environment, risk assessment, control activities, information and communication, and monitoring.
Although the Green Book's direct applicability to particular TUSD activities depends on the governing requirements, its principles are relevant to evaluating public-sector financial management.
The district should have documented controls addressing the preparation, reconciliation, management review, and approval of significant financial reports.
Those controls should also ensure that material financial risks are communicated to the appropriate oversight bodies.
11. Did the Audit Committee Review the FY2026 AFR Before It Was Submitted?
The FY2026 AFR identifies October 7, 2026, as the date the report was uploaded to ADE.
The report contains certification language for the Governing Board and identifies district management officials.
A critical governance question is what review and approval procedures were performed before submission.
Did management provide the Audit Committee with the AFR and supporting financial schedules? Were significant fund balance changes and interfund transfers explained? Were reconciliation differences identified? Was the Governing Board informed of significant financial reporting risks?
The copies reviewed do not establish the complete sequence of internal approvals.
Consequently, it would be premature to conclude from the AFRs alone that a required approval was omitted.
Nevertheless, the district should be able to produce documentation demonstrating how the report was prepared, reviewed, certified, and submitted.
If significant financial reports can be submitted without an effective independent review process, that condition could represent a financial reporting control deficiency.
Whether such a deficiency rises to the level of a significant deficiency or material weakness requires additional evidence and an assessment under the applicable reporting framework.
12. What Should TUSD's Audit Committee Do Now?
The Accountware Group recommends that the Audit Committee request a formal management response addressing the issues identified in the four-year AFR analysis.
The response should include:
A reconciliation of M&O fund balances for FY2023 through FY2026, including all prior-period adjustments.
A multiyear financial forecast showing how management intends to address recurring operating shortfalls.
Documentation supporting the FY2026 interfund transfers, including legal authority and Governing Board approvals.
Explanations of significant administrative, instructional, and special education expenditure changes.
A reconciliation of the AFRs to the district's audited financial statements and underlying accounting records.
An analysis of federal funding reductions and their effect on locally financed operations.
A reconciliation of FY2026 actual expenditures to the FY2027 budget, identifying changes in funding sources associated with the M&O override.
Documentation of the procedures used to prepare, review, certify, and submit AFRs to ADE.
The Internal Auditor should evaluate the design and operating effectiveness of the financial reporting controls, including the controls governing communication of significant financial information to the Governing Board and Audit Committee.
Management should be responsible for developing and implementing corrective actions.
The Internal Auditor should independently evaluate those actions rather than assuming management's responsibilities.
Conclusion: Financial Accountability Requires More Than Filing Reports
TUSD's four years of Annual Financial Reports tell an important story.
The district's M&O Fund balance has deteriorated by more than $46 million. Operating expenditures have exceeded revenues for three consecutive fiscal years. Substantial interfund transfers have been reported. Significant expenditure variances and fund balance reconciliation questions remain to be explained.
These conditions should not be treated as isolated accounting issues.
They are connected to broader questions about financial planning, management accountability, internal controls, and Governing Board oversight.
The purpose of filing an Annual Financial Report is not simply to satisfy an October 15 deadline.
The information should help management and those charged with governance understand the district's financial condition, identify emerging risks, and take corrective action before financial problems become more difficult to resolve.
The most important question is not whether TUSD filed its Annual Financial Reports on time. It is whether management and the Governing Board used the information in those reports to recognize and address the district's deteriorating financial condition.
The taxpayers, parents, employees, and students of Tucson Unified School District deserve a clear answer.
The Accountware Group provides commentary and analysis on financial reporting, internal controls, auditing, risk management, and organizational governance. This article is based on TUSD's FY2023–FY2026 Annual Financial Reports. The observations identify matters requiring explanation and further examination; they do not constitute an independent financial statement audit or a determination of wrongdoing.
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