MPS projected to lose $43 million this year from accounting issue

Milwaukee Public Schools will be shorted about $43 million in state aid for the next school year to make up for a previous overpayment tied to the district's accounting problems, according to information shared Monday by the state Department of Public Instruction.

To cope with the loss of state aid, which will come out of the district's September aid payment, the Milwaukee School Board could make budget cuts, dip into its savings or raise local property taxes.

Many school board members have said they want to avoid any further impact to Milwaukee taxpayers, who already will shoulder an increase in property taxes from the district's referendum.

The $43 million loss in aid represents about 3% of the district's $1.47 billion budget.

Here's what we know about how this happened and the potential impacts.

What errors did MPS make in its accounting?

It has recently become clear that for at least several years, the understaffed MPS finance office was using a messy system of spreadsheets to move data from the district's accounting system to the state's system. More recently, state officials have gotten involved in sorting out errors that have been caused by the problematic operation.

While officials haven't provided a specific explanation of MPS' errors, state data published Monday show the district appeared to report more " shared costs " than it should have in the 2022-23 school year. Shared costs are general costs of running the school district, like paying teachers, that are not covered by specific grants but are shared by the state budget and local taxpayers.

Todd Gray, a financial consultant who was recruited this summer to help the district clean up its finance office, said it's possible that grant-funded expenses were improperly counted as shared costs. But he said there's still work to do to determine exactly what happened.

The result: Because MPS over-reported its costs, it was overpaid by DPI the following year, the 2023-24 school year.

What does it mean that MPS was overpaid?

Gray, who is now serving as the district's new interim chief financial officer, said the outsized state aid last year might not have struck anyone as unusual because there are other factors that influence how much state aid each district receives, including changing allocations from state lawmakers and the total number of students enrolled in each district.

The overpayment from DPI didn't mean MPS necessarily had more money to spend on operations. The district's total operational revenue is capped by a legal limit. With state aid covering more of the district's budget than expected, it could have allowed for a lower local tax levy for district operations, Gray said.

However, another factor impacted the levy for the last school year. As reported by the Wisconsin Policy Forum , when MPS officials discovered last fall that the local levy for MPS would be lower than expected, they increased a different levy that isn't capped by a legal limit. They added about $78 million to the levy for the district's extension fund, which supports the recreation department. Much of that was earmarked for a new community center at the former Browning School, the forum reported.

How could this impact taxpayers?

If the Milwaukee School Board chooses to deal with the loss by making budget cuts or pulling from the district's savings, there could be no impact to December property tax bills.

At least four board members — Jilly Gokalgandhi, Henry Leonard, Megan O'Halloran and Missy Zombor — have said they would avoid any impact to taxpayers this year from the errors. The other four board members did not immediately reply to messages from the Journal Sentinel.

If the board did turn to local taxpayers to fill in some or all of the $43 million hole, it's not yet clear exactly how that would impact the tax rate. When MPS estimated the impact of raising the local levy by about $97 million for the referendum, it projected a property tax increase of about $2.16 per $1,000 of property value, or about $432 for a $200,000 home.

How could this impact MPS' budget?

If the board wants to avoid raising the local tax levy to offset the loss in state aid, it could explore budget cuts. The school board already approved a budget plan for the 2024-25 school year but it can make changes before submitting a final budget in October, which will determine the local property tax levy.

The district's budget plan for the next school year already cut hundreds of staff positions to accommodate rising costs and inflationary raises for staff. Deeper budget cuts could cause longer term problems for the district. If MPS cuts its spending, the state could reduce its funding in future years, Gray said.

Another option is for the board to pull funds from its savings. As of June 2022, the district's operations fund had a balance of about $219 million, budget documents show . As reported by the Wisconsin Policy Forum, it's not clear what the balance is now, or even what it was last year, because the district has not completed its year-end report.

Additionally, Gray said board members will have "other strategies" they could consider, including looking at the district's construction fund and the extension fund, which supports the recreation department. Gray didn't answer further questions about how the board could use those funds. Theoretically, MPS could shield its operations fund from cuts by raising the operations levy while reducing the levies for the other two funds with no net impact on taxpayers.

How does this fit into the broader problems at MPS?

The problems in MPS' finance office began to unravel publicly at the end of May, when state officials, after months of working with MPS behind the scenes, announced that the district had still not provided financial reports that were due last year.

MPS has still not completed those reports, prompting DPI to withhold some state aid pending MPS' progress on a " corrective action plan ."

The district's superintendent, chief financial officer and comptroller have since left MPS.

Some community leaders also blame school board members for not taking stronger action on the pieces of information they were given about the finance office's struggles with turnover and a lack of standard operating procedures. They are gathering signatures to recall half the school board .

MPS school board members, who said they didn't know DPI was having daily meetings with MPS officials about the missing reports, have expressed frustration with MPS administrators and DPI officials for not telling them earlier that the situation was as bad as it was. Administrators repeatedly told board members they were solving the problems.

Board members are now seeking a new superintendent while rebuilding the district's finance office, creating a new chief auditor position , and taking a closer look at operations in all MPS departments. They've also welcomed audits ordered by Gov. Tony Evers to examine the district's operations and academic practices.

Contact Rory Linnane at rory.linnane@jrn.com . Follow her on X (Twitter) at @RoryLinnane .

This article originally appeared on Milwaukee Journal Sentinel: MPS projected to lose $43 million this year from accounting issue