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Unexpected Duluth school cuts loom

t031016 --- Clint Austin --- austinCENTRAL0313c7 --- Old Central High School dominates the Central Hillside sky at dusk on Thursday evening in Duluth. The building needs $18 million of repairs. (Clint Austin /

The Duluth school district is set to fall into statutory operating debt if it doesn't make some quick cuts to its budget — likely more than $1 million.

An independent audit presented to the Duluth School Board Monday showed that the district has no reserve unrestricted cash, and in fact, is about $486,000 in the red. The Minnesota Department of Education will step in if that deficit reaches 2.5 percent of annual expenses, or around $2 million in Duluth's case, warned Deborah Medlin, who presented the audit on behalf of accounting firm Wipfli.

Taking into account other reserves that can only be used for certain expenses, $111,418 remains.

The state of the district's finances "certainly concerns me as a board member, and in the future, as a taxpayer," said outgoing member Art Johnston.

If a district moves into statutory operating debt, the state requires it to devise a plan to get out, which needs to be approved by the state education department.

According to state records, three Minnesota school districts and two charter schools were in statutory operating debt in 2016, out of more than 500 total.

The School Board has a policy that says 10 percent of district expenses should be held in reserve, but that amount — typically around $9 million or $10 million — hasn't been realized for several years. Medlin recommended to the board a minimum of one month of expenses be kept on standby for cash flow. The district's operating budget is a little over $100 million.

The unrestricted reserve drop from $2.4 million last year to its negative balance stems from a couple of things, said Superintendent Bill Gronseth: a planned drawdown of $600,000 for new K-5 reading curriculum, a dip in last year's enrollment that was lower than projected (kindergarten numbers were off by 120 students) and an unexpected hit to the special education budget, thanks to a state funding change that decreased what Duluth received, at the same time the special education bill from Duluth Edison increased, Gronseth said.

The Duluth school district pays most of the special education costs of district students enrolled with Edison and with other area districts that open-enroll its students. (All districts are required to do this.) But state statute doesn't require the receiving entity to disclose costs, so those are unknown until the bill comes, Gronseth said, noting that typically, Duluth comes out ahead by as much as $200,000 in this area. But not last year, and not going forward, because of the formula change.

Edison's costs were nearly $1.2 million more than expected, he said, blindsiding the district and signifying that it must prepare for a similar revenue loss annually, adding to what will likely be another significant deficit for the coming year. The board approved a $1.9 million deficit last June.

Board member Annie Harala was critical that Duluth Edison didn't warn the district of its increased costs.

Johnston said that without knowing the student's needs, there's no way to know whether costs would have increased had the students been enrolled in Duluth schools.

But at least the district would know the expense was coming, Harala said.

Gronseth noted there are efforts afoot by Duluth and other affected districts — such as Minneapolis and St. Paul — to lobby for legislative changes in this area.

In October, Duluth Edison official Bonnie Jorgenson said its special education expenses meet the needs of students within state and federal requirements and have been audited. She said they are held to a "high level of scrutiny."

What next?

Gronseth said the number wasn't firm Tuesday night, but at least $1 million needs to be cut by the start of second semester to balance the budget. Some adjustments related to enrollment loss were already made last year, he said.

While attempts will be made to keep reductions away from classrooms, staff cuts probably can't be avoided, and some projects will be delayed, Gronseth said. One of those includes the $200,000 effort to link Denfeld and East high schools via telepresence for some advanced courses.

Gronseth said he planned to convene an advisory meeting of a community finance group to help set goals to fix the current issues and help build long-term stability. Plans to ask district residents for an increased operating levy will begin with the School Board next month, he said. The current one expires in 2018.

Otherwise, Medlin praised the district for its financial practices, and said nothing significant was found in its audit.

In other news, the board will vote on its tax levy next week, expected to decrease slightly by $100,000 from the previous year, to roughly $31.7 million.