TUSD’s FY2026 Annual Financial Report: What the Governing Board Presentation Did Not Clearly Explain

On October 6, 2026, Tucson Unified School District Chief Financial Officer Ricky Hernández presented the District's FY2026 Annual Financial Report (AFR) to the Governing Board. The presentation described the AFR as an unaudited summary of TUSD's budget-to-actual financial activity and stated that the financial data had been reconciled.  

Many of the numbers presented to the Board agree with the FY2026 AFR. The larger concern is not necessarily that the presentation contains numerous incorrect numbers. Rather, the presentation emphasizes favorable budget-to-actual measures while giving considerably less attention to several adverse financial-condition measures contained in the AFR itself.

That distinction matters.

The $11.3 Million “Budget Balance” Is Not a $11.3 Million M&O Fund Balance

The CFO's presentation reported the following FY2026 Maintenance & Operations results:

• Revised Budget: $391.4 millionActual Expenditures: $380.1 million

• Budget Balance: $11.3 millionPercent Spent: 97%

Those figures agree with the expenditure information in the AFR.     

But what does “Budget Balance” mean?

The $11.3 million represents the difference between TUSD's authorized M&O expenditure budget and actual expenditures. It does not mean that TUSD finished FY2026 with $11.3 million sitting in its M&O Fund.

The AFR reports something very different:

In fact, the AFR identifies the $8.327 million explicitly as a fund deficit.

This distinction is critical for the Governing Board and the public:

Unused budget authority is not the same thing as positive fund balance, cash, or operating reserves.

A district can spend less than its authorized expenditure limit and still finish the year in a deficit financial position.

That is exactly what TUSD's FY2026 AFR reports.

TUSD's M&O Deficit Actually Increased

TUSD entered FY2026 with an M&O fund balance of approximately $(5.703 million).

It ended FY2026 at approximately: $(8.327 million).

Therefore, despite the presentation's emphasis on the $11.3 million “Budget Balance,” TUSD's accumulated M&O deficit worsened during FY2026.

The AFR makes the situation even clearer by comparing the actual M&O position with TUSD's reserve objective.

TUSD reports a targeted FY2026 M&O reserve of approximately:

+$3.808 million

Actual:

$(8.327 million)

That places M&O approximately $12.1 million below TUSD's stated reserve target.

This is a much more meaningful measure of financial condition than simply reporting that TUSD spent 97% of its M&O budget.

The $16.1 Million Transfer Into M&O Deserved Much More Attention

One of the most significant transactions in the FY2026 AFR receives little attention in the CFO's presentation.

The AFR reports approximately:

• M&O revenues: $362.951 million

• M&O expenditures: $380.063 million

That means expenditures exceeded revenues by approximately: $17.1 million

before considering transfers.

The AFR then reports approximately $16.149 million transferred into M&O.

At the same time, the AFR reports approximately $16.149 million transferred out of the Unrestricted Capital Outlay Fund.

The matching amounts strongly indicate that UCO was the source of the transfer into M&O, although the underlying transaction and statutory authority should be examined before reaching a final conclusion.

The financial significance is clear.

Without the $16.1 million transfer, TUSD's M&O operating results would have looked considerably worse.

The Governing Board should therefore understand whether this was a recurring source of operating support or a nonrecurring financing mechanism.

If recurring M&O expenditures continue to exceed recurring M&O revenues, transferring resources from another fund does not by itself correct the structural imbalance.

“Budget Balance Carryforward” Needs Reconciliation

The CFO's presentation takes the issue one step further.

A slide titled “FY2026 Budget Balance Carryforward” shows:

• FY2026 M&O Revised Budget: $391.4 million

• FY2026 Actual: $380.1 million

• Budget Balance: $11.3 million

• FY2027 Adopted Carryforward: $8.0 million

• Difference: +$3.3 million.     

But the AFR reports an $8.327 million M&O fund deficit.

Both figures may be legitimate under Arizona's statutory budget and carryforward calculations. The problem is that the presentation does not provide the Board with a clear reconciliation between them.

A Board member should not be left wondering: How can TUSD have an $11.3 million “budget balance,” an $8 million carryforward, and an $8.3 million M&O deficit at the same time?

Management should provide a straightforward reconciliation explaining each number and why the measures differ.

M&O Spending Did Not Decline

Another statement deserves scrutiny.

The CFO's classroom-spending presentation states:

It also states that total spending declined by $37.3 million, or approximately 7.3%, from FY2025.     

That statement requires considerably more qualification.

The AFR shows:

• FY2025 M&O expenditures: $377.033 million

• FY2026 M&O expenditures: $380.063 million

M&O expenditures therefore increased approximately $3.0 million, or 0.8%.

Some individual M&O expenditure categories also increased.

For example, the AFR reports pupil transportation increasing approximately 10.5%, while special education expenditures increased approximately 4.7%.

Therefore, it would be inaccurate to interpret “spent fewer dollars across all categories” as meaning that all major TUSD expenditure categories declined.

If the CFO intended the statement to apply only to the Auditor General's specific Classroom Spending Report methodology, the presentation should have clearly identified that scope.

Enrollment Declined While M&O Spending Increased

This is where the financial condition becomes particularly important.

The FY2026 AFR reports Average Daily Membership declining from approximately:

FY2025: 37,146

to

FY2026: 35,784

That represents a decline of approximately 3.7%.

Meanwhile, M&O expenditures increased approximately 0.8%.

The result is a fundamental financial-management question:

This issue goes directly to the current discussion about school utilization, consolidation and reconfiguration.

Declining enrollment does not automatically mean expenses should decline at exactly the same percentage. School districts have substantial fixed and semi-fixed costs.

But over time, a district cannot continually lose students and associated funding while maintaining essentially the same physical and operating structure without creating financial pressure.

The General Fund $(251,000) Figure Needs Explanation

The CFO's financial-risk slide reports:

• General Fund Change in Fund Balance

• FY2026: $(251,000)

• FY2025: $(28.3 million)

• Improvement: approximately $28 million.     

That may be a valid calculation under the Arizona Auditor General's Financial Risk Analysis methodology.

But it is not the same as the M&O result shown in the AFR.

The AFR shows M&O moving from approximately $(5.703 million) to $(8.327 million).

That represents deterioration of approximately $2.6 million, not $251,000.

The two measures may use different definitions of the General Fund and different included funds. But that is exactly why a reconciliation should have been provided.

Without one, the Board is being presented with two substantially different measures of financial performance without a clear explanation of how they relate.

“All Financial Data Is Reconciled”

Early in the presentation, management states:

The fact that the AFR is unaudited is clear.

The assertion that all financial data is reconciled deserves supporting documentation.

This is particularly important because the CFO's presentation itself explains that adjusting journal entries, receivables, payables and other accounting adjustments cause the AFR and eventual audited financial statements to differ.     

There should therefore be a documented reconciliation showing:

June 30 Trial Balance → 60-Day Encumbrance Activity → Adjusting Entries → Reclassifications → Final AFR

The Board should be able to see that reconciliation rather than simply being told that the reconciliation occurred.

The Employee Benefits Trust Also Deserves Attention

The presentation reports the Employee Benefits Trust with:

• FY2026 Budget Balance: $(19.179 million)

• Cash Balance: $18.796 million

It compares that with FY2025 cash of approximately $28.316 million.     

That means the reported cash balance declined by approximately $9.5 million in one year.

The AFR's reserve disclosure reports the Employee Benefits Trust's actual reserve at approximately $19.384 million, against a targeted reserve of $21 million.

The difference between the $18.796 million cash balance presented to the Board and the $19.384 million AFR reserve may be entirely explainable—they are different accounting measures—but the two should be reconciled.

More importantly, the decline in the Trust's financial position should not be lost in a presentation primarily focused on budget compliance.

The AFR Itself Says TUSD Must Address the M&O Deficit

Perhaps the strongest evidence of TUSD's underlying financial problem comes not from outside critics but from the AFR itself.

Management states in the AFR that the District will prioritize addressing the $8.3 million

M&O deficit and rebuilding reserves through: targeted budget reductions, school reconfiguration and consolidation, and closer alignment of ongoing expenditures with available revenues.

That is an important management acknowledgment.

It tells the Governing Board that the problem is not merely one of unused budget authority or carryforward calculations.

TUSD has an actual M&O deficit and needs to change the relationship between ongoing expenditures and available revenues.

What the Governing Board Should Have Been Shown

A clearer presentation would have put the following numbers together on one slide:

That table gives policymakers a much clearer picture of TUSD's financial condition than saying M&O was “97% spent” with an $11.3 million “Budget Balance.”

The Questions the Board and Audit Committee Should Ask

The financial records support several questions that should be answered before the FY2026 financial discussion is considered complete:

1. Reconcile the $11.3 million M&O “Budget Balance” and $8.0 million FY2027 carryforward to the AFR's $8.327 million M&O deficit.

2. Identify the source and authority for the $16.149 million transfer into M&O. Was it UCO, why was the transfer necessary, and can TUSD rely on comparable transfers in future years?

3. Explain how TUSD will eliminate the underlying $17.1 million difference between FY2026 M&O revenues and expenditures before transfers.

4. Provide the detailed reconciliation supporting management's statement that “all financial data is reconciled.”

5. Reconcile the $(251,000) General Fund change reported in the Financial Risk Analysis slide to the approximately $2.6 million deterioration in the M&O fund balance.

6. Explain how TUSD will reduce recurring operating costs as enrollment and ADM continue to decline.

7. Reconcile the Employee Benefits Trust's $18.796 million cash balance to the AFR's $19.384 million reserve and explain the approximately $9.5 million year-over-year reduction in cash.

Conclusion: Budget Compliance Is Not Financial Health

The CFO's presentation contains many numbers that agree with the AFR. The concern is principally how those numbers were selected and presented.

Reporting that TUSD spent 97% of its M&O budget is useful for assessing budget compliance.

Reporting an $11.3 million unused budget balance may be useful for calculating statutory carryforward.

But neither tells the Governing Board whether TUSD's core operating fund is financially sustainable.

The FY2026 AFR provides that additional information.

TUSD finished FY2026 with an approximately $8.3 million M&O deficit, approximately $12.1 million below its stated reserve target. M&O expenditures exceeded revenues by approximately $17.1 million before transfers, and approximately $16.1 million had to be transferred into M&O during the year.

At the same time, student membership declined while M&O expenditures increased.

Those facts deserve at least as much attention as the fact that TUSD spent 97% of its authorized M&O budget.

The governance question is therefore not simply whether the numbers in the CFO's presentation were mathematically correct.

It is:

Based on a comparison of the presentation with the FY2026 AFR, that is a question the Governing Board and Audit Committee should examine carefully.