YELLOW SHEET Office of the State Auditor of Missouri Claire McCaskill

February 02, 2004

Report No. 2004-09

St. Louis Public School District is facing a severe budget deficit  for fiscal year 2004 and must make additional cuts to balance its budget

This audit is the first of two reports related to the St. Louis Public School District's financial viability.   For this report, auditors reviewed the factors causing the district's current financial hardship.  Prior to the audit, the district underwent a leadership change from a traditional superintendent to a management consultant team.  The management team took over the district after a May 2003 school board vote.  Shortly thereafter,  district officials learned more about the severity of the cuts in state funding to the district.

Audit sorts out differing budget projections

Before the prior Superintendent left the district, he and his staff projected the district would suffer a budget deficit of $55 million as of June 30, 2004 (if no cuts were made to the budget).  They prepared the projection before the end of  fiscal year 2003.  In July 2003, the management team conducted their own analysis and figured a $73 million deficit as of June 30, 2004 (if no cuts were made to the budget).  The management team prepared this projection using similar methods as the prior Superintendent, but were able to use updated information from the Department of Elementary and Secondary Education and end of the fiscal year figures.  Auditors found the $73 million projection more accurate of the district's actual financial status, and detailed the differences in the two figures in the report.  (See page 6)

Cash flow deficiencies

In addition to the year-end deficit, the management team also evaluated the district's financial position by looking at  cash flow projections. The district has experienced cash flow deficiencies since early fiscal year 2003, but no cash flow projections had been performed.  The prior administration covered cash flow shortfalls with  restricted funds.   The management team projected a cash flow shortfall of $99 million in December 2003 (if no cuts were made in the budget).  Although this cash flow shortfall is not comparable to the year-end budget deficit, auditors found this cash flow shortfall projection accurate and an issue the district should monitor.  After reducing some expenditures and receiving local property taxes earlier, the actual cash flow shortfall in December came to $37.6 million, which the district covered using desegregation funds.  (See page 8)

State funding decrease and limited expense reductions led to deficits

Significant decreases in state funding, inadequate budgetary procedures and limited reductions in expenditures all led to the district's current financial difficulties.  The substantial decrease in state funding was the most significant factor in the district's financial decline. Prior administration officials said they could not have anticipated this sharp decrease in state funding, and contractual obligations made quick, radical cost cuts impossible.  The district has operated with expenditures exceeding revenues since fiscal year 2002, auditors found.  In addition, budgetary procedures were insufficient to monitor the budget.  For example, had the district stayed within their original budgeted expenditures for fiscal year 2003, the year-end balance would have been positive, even with the state cuts.  Instead, the unrestricted operating funds reserve dropped from $55.4 million in June 2001 to a $12.3 million deficit in June 2003, which made the district "financially stressed,"  according to state law.    (See page 9 and 10)

Current budget has deficit, violates state law

The budget approved in August 2003 included a projected deficit of $14.7 million at June 30, 2004, which violated state laws prohibiting unbalanced budgets.    This budget is a projection and will be revised by the management team to more accurately reflect actual activity and project the year-end deficit. (See page 11)

The State Auditor's Office is continuing to audit the operations of the district and any findings and recommendations will be included in a subsequent report. 

Complete Audit Report