Budget Update

The administration has not recommended a forensic audit at this time for several reasons. First and foremost, there is no evidence suggesting that district funds have been diverted for personal gain. Although expenditures have exceeded budgeted amounts, these overages appear to be related to investments aimed at enhancing district operations, safety, security, and overall performance. As the administration works through an inherited situation that is not grounded in best practices, the district is also:

• moving into the external 2023-2024 audit, 

• collaborating with Baird to assist with cash flow, 

• partnering with an independent audit firm to review bank reconciliation processes, and 

• working with an independent specialist with expertise in financial controls and processing. 

We remain vigilant and committed to thoroughly examining all aspects of our financial practices. Should any evidence emerge suggesting misconduct or improper use of funds, the administration will promptly recommend a forensic audit to the board to address such concerns. It is worth noting that forensic audits typically start at $80,000, a significant investment that would be undertaken if warranted by evidence.

The Business Services team is currently working on creating a more detailed budget for the 2024-25 projected expenditures as they work to create a balanced budget. This budget will accurately reflect operating costs and is expected to be ready for School Board approval by the October 30 meeting.

The community is always encouraged to engage in the district's financial operations by reviewing School Board documents online, attending or viewing  live-stream and recorded School Board meetings, attending in-person or virtual Board committee meetings, and speaking during public comment forums. You can also email, call, or request to meet with Board members one-on-one or with the administration to discuss any concerns or ideas.

In addition, the Policy Committee is currently working to establish a standing Finance and Operations Committee through policy 0155. It is proposed that this committee–along with the Teaching, Learning, and Equity Committee–shall include both community and staff advisory members. The goal is to have the process for taking applications and interviewing candidates ready in October.

A review of District finances by our new Superintendent and Assistant Superintendent has uncovered that the District has been operating in a deficit over the last three years and is nearing the depletion of its fund balance. Specifically, $7.9 million of fund balance has been utilized, leaving a balance of $2.5 million or about 4% of our operating budget.

The district has been operating in a deficit over the last three years and is nearing the depletion of its fund balance. Specifically, $7.9 million of fund balance has been utilized, leaving a balance of $2.5 million, or about 4% of our operating budget. Board policy 6235 requires a minimum of 15% of our budget to be in fund balance. 

This will have operational impacts as we address acute cash flow needs and plan for a sustainable future for the district. 

We have acute cash flow needs and long-term fiscal sustainability to address. The August 22 Special Meeting will conclude with consideration and potential approval of a resolution to obtain an operational loan. This loan would be used to retire part of the district's existing short-term debt and cover operating expenses in the coming months.

Getting the fund balance back in compliance with board policy and operating with a balanced budget will take time, requiring difficult decisions and an intentional effort to rebuild trust. We will need to think differently about how we use the resources we have. 

The first step is to continue the current examination, inspection, and analysis of records. While there are some immediate next steps, as listed in the FAQ above, the full scope of the path forward will result from a collaborative process involving residents, families, and staff. The board cannot do that work in isolation and is committed to transparency and open communication to ensure all impacted parties have a voice in the process.

Our number one priority is our students. Although we know we will have to change the way we do business, all financial decisions will be made with students at the center.

Maintaining high-quality educational experiences for our students necessitates the retention of high-quality staff and programming, even while the district reduces expenses.

To start, we are:

• Hiring a new financial advising firm and a new auditor

• Reducing expenditures to mission critical items for the 2024-25 Adjusted/Final Budget in October

• Conducting long term financial planning to outline our strategy to rebuild the fund balance in alignment with board policy and provide future financial sustainability

• Implementing increased scrutiny and adherence to new and existing checks and balances  

• Assuring quarterly budget reports to the board take place

In reviewing Board policy, non-compliance has been identified in Board policies, including: 

• policy 6111 on establishing internal controls

• policy 6210 on fiscal planning 

• policy 6220 on budget preparation

• policy 6231 on budget implementation

• policy 6235 on fund balance, and 

• policy 6830 on audits.

There is no evidence that district money was diverted by anyone for personal gain. Although expenditures were in excess of budgeted amounts, they all appear to be investments intended to enhance district operations, safety and security, and performance. 

The district provided information that was known to be true at that time. No single action brought us here, as this is the culmination of multiple failures in policies and practices over several years. Some statements made in advance of the referendum may no longer be accurate, but there were no intentional falsehoods, misdirections, or misrepresentations provided to the community. 

Over the coming days, weeks, months, and maybe years, the board will need to reconcile the fact that many commitments that were made to the community when those referenda were proposed and passed may no longer be accurate.

The School Board has no intention of going to referendum to solve this problem. Therefore school taxes will not be impacted by this situation. Because the 2023 referendum was designed to increase over time, and because school districts do not control how taxes are levied by municipalities, school taxes will continue to change over time. Future changes will not be connected to this situation.

The last audit was conducted in 2022-23; an audit for 2023-24 had not been started prior to our new Assistant Superintendent joining the district on July 1. An audit of the 2023-24 fiscal year has since been initiated.

Findings related to federal awards date back to 2017-18, but 2020-21 was the first year of findings with district financial statements.

In 2020-21, audit comments relating to account reconciliations in our financial statement first appeared. At that time, the district laid out a plan of response. 

In 2021-22, a financial audit of the district found what is called a “material weakness” related to account reconciliations not being done in a timely manner. A material weakness is something that is pervasive and/or a significant dollar amount. The audit comments and subsequent plan of response from the 2020-21 audit were not resolved, which led to the 2021-22 financial audit including a "material weakness" related to the same comment in the 2020-21 audit. The deficit for the 2021-22 fiscal year was $900,000. 

In 2022-23, a financial audit again found a material weakness in account reconciliations. In addition, expenditures exceeded revenues by $2.9 million. This action reduced the fund balance to 12%, a level that was out of compliance with School Board policy requiring a minimum of 15%.

The district is working with a variety of experts in several capacities. To address immediate financial concerns, the district is working with Robert W. Baird and Co. to ensure that district operational expenses are fully covered through the 2024-25 school year. Our financial consultants are working to verify and correct comprehensive financial data to determine the full extent of the budget deficit, to advise on spending without impacting student experiences, and to seek additional revenue opportunities. 

The district also remains in contact with its legal and fiscal counsel on all relevant matters.

Transparency is critically important to rebuilding trust. As such, the School Board intends to provide the community with all available information about how we arrived at this point, as well as detailed information on the timeline of events and immediate next steps being taken to stabilize the situation. 

Easily accessible financial statements, audits, budgets, and other relevant documents will be posted to the website and updated regularly.

Our cash flow has been impacted considerably due to the reduction in fund balance. Many school districts in the state of Wisconsin have to engage in short-term borrowing to cover expenditures while waiting for property tax revenue in January. Property taxes are the biggest portion of revenue for most districts, and the first installment is not received until six months after the start of the fiscal year (July 1). 

The district borrowed $12.2 million in fall 2023 to cover expenditures during periods of low cash flow. To short-term borrow for the 2024-25 fiscal year, the district must pay off the $12.2 million borrowed in the previous fiscal year. Unfortunately, due to the reduction in fund balance, the district does not have enough funds to pay the 2023-24 debt. 

The condition of the district’s fund balance has created the need for us to take additional steps to secure funding for operations through January 2025. An operational loan is necessary to pay off a portion of the outstanding debt, which will allow the district to short-term borrow for the 2024-25 fiscal year. This loan will be considered by the board at its August 22 meeting. 

Governments (such as school districts) usually organize their accounting systems on a "fund" basis. A fund is a separate set of accounting records, recorded and established separately from each other to show that financial resources are being used only for permitted purposes. 

The Wisconsin Department of Public Instruction (DPI) specifies the various funds required to be used by Wisconsin school districts. All school districts have a General Fund and may have one or more other funds to account for specific activities. For example, special education activities are accounted for in the Special Education Fund. Transactions relating to payment of general obligation debt are accounted for in a debt service fund.

Having a fund balance is not the same thing as having cash on hand because assets and liabilities may fluctuate throughout the fiscal year. A fund balance is a snapshot in time as of the date it is calculated.

A fund’s balance is what’s left over after subtracting its debts from its assets. If this number is positive, it can be used to cover expenses in the next budget year. A deficit fund balance can only be recovered by having revenues exceed expenditures in a future fiscal period.

More information on fund balances can be found on the DPI website. 

The School Board is committed to creating opportunities for community feedback as we have more information and as future plans come together. 

Information is available on our website, and questions and feedback can be addressed to the School Board by emailing mgsd.board@mgschools.net. 

There are a few different ways to calculate this. Fund 10 (General fund) and Fund 27 (special education fund) salaries and benefits (“total compensation”) make up 74% of net expenditures (removing the Fund 27 transfer from the total gross expenditures of Fund 10 & 27). This is a more accurate look at what portion of our budget is compensation, rather than comparing compensation against the entire operating budget.

The $7 million operational loan will help cover operational expenditures so that our payments can be made on our short term borrowing. All other debt payments are assigned when the levy is set by the board each year. Referendum debt (Fund 39) allows the District to add the annual payments to our levy each year. Non-referendum debt (Fund 38), which is what the operational loan is, must be paid from the operational budget. Those dollars are set aside first before budgeting for other operational expenditures. The levy is not impacted by non-referendum debt.

We will seek an operational loan in the amount of $7 million; that loan and short-term cash flow borrowing will allow us to remain solvent.

The $7 million operational loan will replenish the fund balance in the short term. In the long term the Board will develop a plan to build back the balance over time.

Our options are extremely limited due to the existing debt from previous borrowing. The operational loan is the option available to us.

Because the Board must conduct its business in open, public meetings, this work is still ongoing. On the staff side, our business services team has begun with a review of internal controls for best practices and will update processes as necessary. Department leadership has also established consistent, monthly cash deposits and bank reconciliations that are reviewed monthly by the Assistant Superintendent. There will be monthly budget tracking and quarterly budget reports to the Board, as well as monthly budget reviews with each building and department.

The $7 million operational loan will replenish the fund balance, which in turn free up funds to pay off the short term debt. Non-referendum debt (Fund 38), which is what the operational loan is, must be paid from the operational budget. Those dollars are set aside first before budgeting for other operational expenditures. The levy is not impacted by non-referendum debt.

This meeting was not purposely scheduled in order to conflict with any other events. Except for extenuating circumstances, the School Board holds its special meetings at 6pm. The meeting needed to be held as soon as possible due to the consideration of the operating loan. Qualifying for the loan requires a petition period of 30 days; extending the meeting beyond August 22 would mean we would miss the deadline(s) for existing payment obligations. We would not have the cash needed to cover operational expenditures.