Report shows AAPS didn't adjust to increased costs

ANN ARBOR, MI – Ann Arbor Public Schools' budget deficit that caused it to cut $20.4 million for the coming year was primarily due to increased payroll costs approved by the school board without the revenue to support it, a report on the district's budgeting found.

The Ann Arbor School Board voted 6-1 to release the report and provide the report's findings during a presentation from auditor Plante Moran during its meeting Wednesday, June 26.

The analysis of the district's budget workbook conducted and presented by Plante Moran showed the district's current budget woes are due to increased costs that included the approval of employee agreements that were not supported by increased revenue due to a loss of around 1,100 students over the past four years.

Interviews Plante Moran conducted with former Superintendent Jeanice Swift and Chief Financial Officer Jill Minnick indicated the administrators tried to warn the school board it would need to cut the 2023-24 budget by $12 million in March and April 2023.

“The original budget presented was improbable and was maybe based on hope,” Plante Moran Partner Michele McHale said. “Without significant expenditure reductions, the obvious red flags should have been identified by management and the board, for which responsibility for the current situation is shared.

“If you don't cut your expenses, this disparity would eventually lead to and contribute to the shortfall in the budget fund balance.”

Plante Moran's presenters provided clarity on the district's accounting regarding a $14 million one-time state retirement funding payment to a district financial advisor previously said was budgeted as a revenue and not an expense. In reality, the was recorded as both a revenue and an expense, but that both of those entries were wrong.

Auditors found that while the district included the payment in a budget projection incorrectly, the mistake had no bearing on its current fund balance issue.

“To be clear, that is not recorded currently in the district's books and records that carry forward of that amount, but it was included in the budget projection,” Plante Moran's Jennifer Chambers said. “That is not something that should have been there, but they were in the exact same amount, and so the impact to the fund balance projected was zero.”

While the presentation to the board regarding the 2023-24 budget was misleading, McHale said, the board didn't question that expenditures presented were nearly flat from the prior year with higher salaries on the horizon estimated to be $12.3 million.

The current budget shortfall, which was projected to be $25 million in March, came as a result of increased costs, from 2% increases in salaries across employee groups to an approximately $5 million annual increase in substitute teacher costs since the COVID-19 pandemic.

“We've not absolutely confirmed all of these assertions, but it's reasonable, given what has gone on in the economy, that costs did increase in the district,” McHale said. “We've seen it at grocery stores, we've seen it everywhere. No matter the level of these cost increases, they will negatively impact any budget when you don’t have the revenue to support it.”

Swift said in interviews that she had discussions with the board that it would need to cut approximately $12 million in the next fiscal year to offset the costs associated with the contracts approved in March and April 2023.

Swift had described a plan to make reductions in a “phased process” over the next few years, describing her approach as using a “scalpel” with precision, versus using an axis to make the reductions in “bulk.”

Another presentation by Minnick are the same time showed there was minimal variance in comparing the previous fiscal years with the negotiated salaries and benefits needing to be accounted for in alignment with the district's resources.

“In summary, it is illogical that expenditures did not increase in the original budget to reflect these new contracts,” McHale said. “It would have been prudent for the board to have question management regarding the minimal change in the expenses after the recently approved wage increases.”

Chambers said the board and district also should have been more closely monitoring AAPS' fund balance as a percentage of its expenditures – a number that had fallen to just 4.1% by the close of the 2023-24 budget year and had decreased to approximately 1.5% to close out the current budget year.

“When you're looking at the fund balance in absolute terms, that number might fluctuate, but when you compare it to your expenditure base, then you kind of know, year to year, apples to apples, are we declining? Are we kind of spending more and not saving as much in fund balance or the opposite? So really, over those last few years, we’ve seen that evidence of decline.”

Board member Jeff Gaynor said many of Plante Moran's findings made sense in retrospect and provided helpful context about its current budget issues.

“The key finding, which you are very clear about, is that in the 23-24 budget, the expenditures on the budget presented to us were nearly identical to the previous year's budget,” he said. “It is perfectly logical now, in retrospect, and should have been at the time that we question that. So we are guilty for not asking enough questions, for not analyzing it another way.”

Overall, Chambers said the district's collection of data and procedures during the budgeting process were deemed “reasonable.” Chambers said a report of its findings will be available for the district to post on its website Thursday.

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