Chris Hermann

A relatively new tool released by the Arizona Auditor General for assessing school districts’ financial health shows Kyrene School District is at “high risk” in three of 10 measures of fiscal soundness.

But Kyrene Chief Financial Officer Chris Hermann told the school board last week that the metrics are only “indicators” and “guideposts” to help districts and the Auditor General identify troubling fiscal trends.

Kyrene is rated at high risk for declines in state reimbursement caused by enrollment shrinkage – the only factor rated high risk for Tempe Union as well – and for two areas involving its capital budget.

One area is a 26.8 percent decline in its capital reserves between the 2018-19 and 2019-20 fiscal year and the other Kyrene’s redirection of 44.8 percent of its capital budget this fiscal year to shore up operational spending.

“I think you could really kind of look at what happened last year as being clearly relating to the COVID-19 pandemic,” Hermann told the board. 

“And so, we were faced with some really difficult budget-balancing situations last year,” he said, explaining “the capital spending really was done because we did not have additional funding coming to us as a school district.”

Noting “there are no official penalties or things like that” for edging into a high-risk category, Hermann said:

 “It’s good for us to be aware of those things. It’s actually very good because you can compare all public-school districts and only public-school districts are required have that information provided.

“Not all public funded schools are required to have that same information,” he added, indicating charter schools that get tax dollars are not included in the new measurement tool, which is at frisk.azauditor.gov.

Kyrene is far from being the only district cited as high risk in any of the three categories.

The AG site shows that of 207 public school districts in Arizona, 104 are at high risk for enrollment decline, 74 for declines of more than 25 percent in their capital reserves and 51 for directing more than 25 percent of capital funding to operational costs.

Kyrene is also far from the dire fiscal straits in which 13 school districts are in. 

Those 13 districts “are at higher financial risk than other Arizona school districts,” the Auditor General states, “based both on their current and potential future financial difficulties. 

“Collectively, the measures relate to a district’s overall financial risk of not being able to operate within its available cash resources and budget constraints.”

Only one of the 13 imperiled districts, Apache Junction Unified, is in Maricopa County and most are in the southern half of the state.

The AG explains why it monitors the use of capital dollars to cover operating expenses: 

“Districts that direct a substantial portion of their intended capital funding to operational spending may be at higher financial risk if they are putting off necessary operational spending cuts or when large capital spending needs arise, especially if they have lower-than-average capital reserves.”

Data on the AG’s site show Kyrene has a five-year average of transferring about a quarter of its capital funds annually to cover operating expenses and that its first big transfer occurred well before the pandemic.

While the district respectively transferred only $757,689 and $722,309 in each of the 2016-17 and 2017-18 fiscal years, it transferred nearly $2.3 million of $9.4 million capital dollars to operations in the 2018-19 fiscal year.

As the pandemic forced spending on cleaning supplies and technology in the 2019-20 fiscal year, Kyrene moved nearly $3.8 million of $11.7 million from its capital reserves to operational spending.

In the current fiscal year, it has transferred $5.71 million of $12.75 million to operations, the AG says.

Hermann throughout his presentation on Kyrene’s future capital spending stressed that the district is mindful of the Auditor General’s assessment as well as the strain that pandemic-related expenses have imposed on its capital budget.

But he said decisions to shift capital monies to the district’s Maintenance and Operations Fund was “based on our ability to maintain a balanced budget in light of having to comply with the state mandate to continue to pay employees throughout the duration of last (school) year.

“And so Kyrene was in a very difficult financial position with our community educational staff because there was no revenue to pay for those employees as many programs were either canceled or they had very low participation.”

For its capital budget in the coming school year, the district is projecting $6.6 million from the state, $6.8 million from the capital override voters approved in 2017 and $30 million from a bond sale sometime next spring.

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