Welcome to November, the season of school district audit reports. It's that time of the year when Boards of Education and taxpayers dive into the numbers, aiming to glean valuable insights from this often underestimated process. While the word 'audit' can be intimidating, in the realm of public school districts, it's a critical pillar of institutional trust, and the results can offer more than meets the eye
The very word “audit” is alarming because individual taxpayer audits by the IRS are rare. According to Syracuse University, the IRS audited only 0.4% of the 160 million tax returns filed by U.S. taxpayers in 2021. (Sorry if this hits a sore spot for you. We’re just trying to make a point.)
Public school audits are a must—mandated by law. Most will result in an “unqualified opinion," meaning the district is adhering to appropriate accounting standards and has passed all tests conducted by the auditing firms. The figures can be trusted.
But that doesn't mean the figures are good.
A Clean Audit Is Not a Measure of Financial Quality
A district that receives a clean audit report, however, may not be managing their finances well. Audit results present a means of assessing a district's financial management skill, but not based on whether accounting practices are being adhered to.
One example: a district could receive a clean audit yet have poor financial results. Out of the state’s 532 traditional (non-charter) public school systems, the average operating surplus was 3%. This means that on average, Michigan school district revenues exceeded their expenses by 3%. Let's bundle the districts by their financial results:
72% of districts ran a surplus. These districts did at least “ok” financially. (We'll issue a qualifier later.)
About 10% of districts operated on a “break even budget,” meaning expenses and revenues were about equal.
The remaining 18% (about 120 districts) ran deficits.
More than half of that 18% operated at significant losses. Almost all of those will have a clean audit, but the quality of their financial management deserves further scrutiny.
The Pre-eminence of Forecast Accuracy
There are other examples of districts that will receive clean audits—and whose revenues significantly exceed expenses—but who can and should use the audit for a different kind of quality test.
Of all measures of financial control and oversight metrics, districts (and especially their Boards of Education) ought to be measuring forecast accuracy. In many ways, forecast accuracy is a better measure of financial oversight than profitability.
When the administration brings budgets—and subsequent budget amendments—to the Board of Education for approval they are communicating to their Boards that they have accounted for all variables. Their proposed budget advocates for a use of funds (a budget) that is responsible both to the educational welfare of students and to taxpayers. Taxpayers rightfully expect that funds will be used to help students.
When the audited results come into view, it offers an opportunity for a Board of Education to assess how well the administration has forecasted revenues and expenses so that students and taxpayers can be optimally served. When the audit shows that the actual expenditures (or revenues!) vary significantly from adopted budgets (or amended budgets) opportunities have been missed—EVEN when the result is higher fund equity.
Missed Forecasts Are a Missed Opportunity
Educational tax dollars are collected specifically to progress the educational development of students. How might students have been better served if the tax dollars collected for their benefit are not put into play? Could students have received more individual attention if the administration had more accurately forecasted expenses and revenues? Could they have hired more teachers? More paraprofessionals? Could they have retained more teachers and reduced staff churn? Could more routine building maintenance issues been addressed rather than waiting for a bond passage?
Of course missing budgets and forecasts resulting in a wider operating loss is just as bad (if not worse) but the fundamental premise is the same. Boards of Education should be more pleased if the administration’s forecasted operating loss is realized rather than be surprised when a forecasted surplus is proven, by the audit, to have actually been a loss.
All this is to say that forecast accuracy is valued above any surprise result. A budget proposed by the administration IS in itself a forecast. It is THE statement from the administration to the Board and the public that the figures are what is expected to happen.
An accurate forecast exceeds most other measures of financial acumen. In Michigan, the financial sun is shining now, as 72% of Michigan districts can attest. But good times almost always turn to tougher times and forecast accuracy will become even more important. It's more fruitful to practice harder when the sun is shining. It will rain soon enough.
In summary, especially of note to Board of Education watchers or trustees:
Use this audit season to assess your district’s forecast accuracy.
Pay attention to the progression of originally adopted budgets to their subsequent revisions (via G.A.A.A.s)
Take note of what investments you would have endorsed had you known the surplus was going to be higher than expected.
Continue to read these pages as we explore strategies to enhance forecast accuracy.