TUSD's Disappearing M&O Budget Capacity: The Arizona Auditor General's Financial Warning
A Follow-Up to: 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
The Arizona Auditor General has identified Tucson Unified School District as one of Arizona's highest-risk school districts. Its findings reveal declining operating budget flexibility, deteriorating financial reserves, declining enrollment, and growing reliance on capital funding to support operations.
1. The $58 Million Operating Deficit Is Only Part of TUSD's Financial Problem
In our previous article, The Accountware Group examined how Tucson Unified School District (TUSD) spent approximately $58.14 million more in Maintenance and Operations (M&O) expenditures than it received in M&O revenues during fiscal years 2024 through 2026, before transfers and other financing activities.
That analysis raised serious questions about the district's financial sustainability and management's responsibility to maintain adequate financial reserves.
There is another important financial issue that deserves public attention.
TUSD has also been consuming its accumulated M&O budget capacity.
The Arizona Auditor General documented this problem in its January 2026 School District Financial Risk Analysis, which classified TUSD as among the state's highest-risk districts.
The Auditor General's findings are particularly significant because they represent an independent state assessment of the district's financial risks.
They establish that concerns about TUSD's financial sustainability are not limited to the conclusions of outside observers.
2. What Is M&O Budget Capacity?
Arizona school districts operate under legally established expenditure limits.
The M&O budget limit determines how much a district is authorized to spend on Maintenance and Operations activities, subject to applicable state budget rules.
The difference between the authorized spending limit and actual expenditures represents unused M&O budget capacity.
The basic calculation is:
Unused M&O Budget Capacity = Authorized M&O Budget Limit − Actual M&O Expenditures
This amount is also described by the Arizona Auditor General as the M&O budget limit reserve.
It is essential to understand what this measurement represents.
M&O budget capacity is spending authority. It is not cash, operating revenue, or an accounting fund balance.
A district can have substantial unused spending authority while experiencing serious financial problems.
For example, a district might have legal authority to spend an additional $20 million but lack the revenues or financial reserves needed to support that spending.
That distinction is fundamental to understanding TUSD's financial condition.
3. TUSD Has Consumed More Than $13 Million in M&O Budget Capacity
The Arizona Auditor General published the following M&O budget information for TUSD.
Fiscal Year | Authorized M&O Budget Limit | Actual M&O Expenditures | Unused Budget Capacity |
FY2021 | $316.47M | $293.60M | $22.87M |
FY2022 | $339.06M | $313.27M | $25.79M |
FY2023 | $371.61M | $333.43M | $38.18M |
FY2024 | $402.89M | $370.45M | $32.44M |
FY2025 | $401.31M | $377.03M | $24.27M |
Source: Arizona Auditor General, January 2026 School District Financial Risk Analysis. FY2025 information was unaudited when the analysis was prepared.
TUSD's unused M&O budget capacity reached approximately $38.18 million in FY2023.
By the end of FY2025, that amount had declined to approximately $24.27 million.
That represents:
$13.91 million in reduced budget capacity.
A 36.43% reduction from FY2023.
A 25.18% reduction during FY2025 alone.
The Auditor General specifically identified the reduction in operating budget limit reserves as a financial risk indicator.
The state also explained that the district had accumulated additional budget capacity during the period when federal COVID-19 relief funds were available.
As those temporary resources disappeared, the district continued to face financial pressures.
This is an important lesson in public-sector financial management.
Temporary funding should not be treated as a permanent solution for recurring operating expenditures.
4. TUSD's General Fund Financial Reserves Have Also Deteriorated
The Auditor General's analysis identified another serious issue: the deterioration in TUSD's General Fund financial position.
The state reported the following financial measurements.
Financial Indicator | FY2024 | FY2025 |
General Fund revenues | $400.66M | $362.22M |
General Fund expenditures | $412.39M | $395.81M |
Operating margin | −2.93% | −9.27% |
Operating reserve ratio | 21.51% | 9.76% |
The Auditor General also reported a 42.25% decline in the General Fund balance during FY2025.
According to the state's assessment, the remaining General Fund reserves would cover just over one month of expenditures entering FY2026.
These results demonstrate why unused M&O budget capacity should never be confused with available financial reserves.
The two measurements serve different purposes.
The General Fund figures measure a broader financial reporting category and should not be treated as interchangeable with the M&O Fund figures in our previous article.
Nevertheless, both sets of measurements indicate increasing financial pressure.
A declining reserve ratio reduces an organization's ability to respond to unexpected expenses, enrollment changes, revenue disruptions, and other financial risks.
5. TUSD Is Also Using Capital Funding to Support Operations
Perhaps one of the most concerning findings in the Auditor General's analysis involves TUSD's use of capital resources.
Capital funding is intended to support important long-term needs, including facilities, equipment, and other eligible capital expenditures.
Arizona law permits certain capital monies to be redirected to operating purposes.
However, relying on capital funding to support ongoing operations can create future financial problems.
The Auditor General reported the following:
Fiscal Year | Capital Funds Redirected to Operations | Percentage of Capital Monies |
FY2022 | $0 | 0% |
FY2023 | $0 | 0% |
FY2024 | $2.0M | 8.67% |
FY2025 | $10.0M | 44.41% |
FY2026 | $10.0M | 45.15% |
In FY2025 and FY2026, TUSD redirected $10 million annually from capital funding to operational spending.
That represented approximately 44% to 45% of the capital monies measured by the Auditor General.
The state warned that this practice could indicate delayed operating expenditure reductions or increase the risk of insufficient capital budget capacity when significant capital needs arise.
This finding deserves particular attention because TUSD operates a large portfolio of school buildings and other facilities.
Reducing the resources available for capital needs while continuing to support recurring operations can create additional financial pressure in future years.
The Governing Board should require management to explain how these transfers affect the district's long-term facilities and capital maintenance plans.
6. Declining Enrollment Makes the Problem More Difficult
The Auditor General also identified declining enrollment as a significant financial risk.
TUSD's weighted student count declined approximately 8.99% between FY2022 and FY2026, including a 3.68% decline in FY2026 to date when the January assessment was prepared.
Arizona school district funding is substantially influenced by student enrollment and weighted student counts.
When enrollment declines, the revenues generated through the state's funding formulas can also decline.
However, many school district operating expenses do not automatically decrease at the same rate.
Buildings still require maintenance.
Administrative departments continue operating.
Utilities, insurance, technology, transportation, and other costs remain.
A district experiencing declining enrollment must evaluate whether its organizational structure and operating costs remain appropriate for the number of students it serves.
Failure to adjust recurring expenditures to recurring revenues can result in continued financial reserve depletion.
That is why school utilization, administrative staffing, and the cost of operating underutilized facilities should be integral parts of TUSD's financial recovery planning.
7. The FY2026 Financial Statements Raise Additional Questions
The Auditor General's January 2026 analysis did not include completed FY2026 M&O financial results.
However, TUSD subsequently filed its FY2026 Annual Financial Report.
The financial analysis discussed in our previous article identified the following:
FY2026 M&O Measurement | Amount |
M&O revenues | $362.95M |
M&O expenditures | $380.06M |
Expenditures exceeding revenues, before transfers | $17.11M |
Reported ending M&O fund balance | −$8.33M |
These figures are from The Accountware Group's analysis of the FY2026 AFR, not from the Auditor General's January assessment.
The reported negative $8.33 million M&O accounting fund balance requires careful interpretation and reconciliation with the district's original AFR schedules.
It should not be confused with the Auditor General's $24.27 million in unused FY2025 statutory M&O budget capacity.
The district may have unused legal spending authority while simultaneously reporting an unfavorable accounting fund balance.
Both conditions can exist.
The important governance question is whether management has provided the Governing
Board and Audit Committee with a complete explanation of the district's financial position.
8. The Auditor General's Warning Should Not Be Misrepresented
The Auditor General's assessment did not conclude that TUSD had already violated its statutory expenditure limits or exceeded its available cash resources.
In fact, the state expressly acknowledged that the district had not yet exceeded those limits.
However, the state also concluded that TUSD faced high financial risk and needed to implement appropriate risk-mitigation measures.
That distinction is important.
A district does not have to violate state spending laws before its financial condition becomes a serious governance concern.
Effective financial management should identify and correct problems before an organization reaches a financial crisis.
The purpose of financial oversight is not simply to determine whether management complied with last year's spending limits.
It is also to determine whether current financial practices are sustainable.
9. What Has TUSD Management Done to Address These Risks?
The Auditor General's website includes a financial risk action plan prepared by TUSD management.
That action plan describes identified root causes, planned mitigating actions, and estimated financial effects.
The existence of the plan is important. It means management has formally acknowledged the need to address the state's financial risk findings.
However, an action plan is not the same as completed corrective action.
The Governing Board and Audit Committee should evaluate whether management's measures are producing the expected financial results.
At a minimum, the public should be able to determine:
Which corrective actions have been completed?
How much recurring annual expenditure reduction has actually been achieved?
How much of the improvement depends on additional tax revenue or transfers between funds?
When will recurring revenues cover recurring operating expenditures?
What is the timetable for restoring financial reserves?
How will the district protect capital funding needed for its buildings and facilities?
What financial indicators will demonstrate that TUSD is no longer among Arizona's highest-risk school districts?
These questions require documented financial answers.
They should not be answered solely with statements about anticipated future improvements.
10. Management and the Governing Board Have Different Responsibilities
TUSD's superintendent and financial management are responsible for developing and maintaining effective financial management and internal control processes.
Those responsibilities include identifying financial risks, preparing reliable financial information, evaluating alternatives, and recommending corrective actions.
The Governing Board is responsible for oversight and major policy decisions.
The Audit Committee should support that oversight by reviewing financial reporting risks, internal controls, audit findings, and management's corrective-action processes within its charter.
These responsibilities are consistent with the governance principles described in the U.S. Government Accountability Office's Standards for Internal Control in the Federal Government, commonly known as the Green Book.
Although the Green Book is not automatically binding in its entirety on Arizona school districts, it provides a useful framework for evaluating public-sector internal controls.
A fundamental principle is that management must identify, analyze, and respond to risks that threaten organizational objectives.
Financial sustainability is clearly one of those objectives.
The Auditor General has already identified significant financial risks at TUSD.
The issue now is whether management and the Governing Board can demonstrate that those risks are being effectively reduced.
11. The Public Deserves a Financial Recovery Scorecard
The Accountware Group believes TUSD should publish a quarterly financial recovery scorecard.
The scorecard should include:
Financial Measurement | Information to Report |
M&O operating results | Actual revenues, expenditures, and operating surplus or deficit |
M&O accounting fund balance | Beginning balance, changes, and ending balance |
M&O budget capacity | Authorized spending limit, actual expenditures, and unused authority |
General Fund reserves | Reserve balance and operating reserve ratio |
Capital funding | Capital revenues, expenditures, and amounts redirected to operations |
Enrollment | Actual and projected student counts |
Cost reductions | Planned versus realized recurring annual savings |
Reserve recovery | Progress toward the Governing Board's approved target |
This information should be presented consistently so that taxpayers can evaluate the district's progress over time.
The scorecard should also identify corrective actions that are behind schedule or failing to achieve projected savings.
A financial recovery plan without measurable performance reporting provides limited accountability.
12. The Bottom Line: TUSD Is Losing Financial Flexibility
The Arizona Auditor General's January 2026 analysis established several important facts.
TUSD consumed approximately $13.91 million of its accumulated M&O budget capacity between FY2023 and FY2025.
Its General Fund financial reserves deteriorated substantially.
Its weighted student count continued to decline.
And the district increasingly redirected capital resources to support operating expenditures.
These findings must be considered alongside the $58.14 million in cumulative M&O operating shortfalls identified in our previous article.
Together, the information presents a substantial financial management challenge.
TUSD has announced corrective measures, including changes to its operating structure and proposed school consolidations. Those measures deserve to be evaluated on their actual financial results.
The question is no longer whether the district faces financial risk. The Arizona Auditor General has already answered that question.
The question is whether TUSD's leadership has established a financial recovery program that will produce measurable, sustainable improvements before additional financial flexibility is lost.
TUSD's students, employees, taxpayers, and other stakeholders deserve a clear answer.
Sources and References
Arizona Auditor General — Tucson Unified School District Financial Risk Analysis, January 2026.https://frisk.azauditor.gov/District/Tucson_Unified_School_District
The Accountware Group — TUSD's $58 Million M&O Spending Problem: Why Financial Reserves and Management Accountability Matter.https://www.accountwaregroup.com/post/tusd-s-58-million-m-o-spending-problem-why-financial-reserves-and-management-accountability-matter
Tucson Unified School District — FY2026 Annual Financial Report.
Arizona Auditor General — Uniform System of Financial Records.https://www.azauditor.gov/usfr
Arizona Auditor General — Fund Balance Reserve Reporting.https://www.azauditor.gov/fund-balance-reserve-reporting
U.S. Government Accountability Office — Standards for Internal Control in the Federal Government (Green Book).
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