Hard choices in Alaska as accounting error adds to school district’s challenges

Accounting errors are a key factor driving Alaska’s Juneau School District into a shortfall amounting to more than 10% of its operating budget.

But other underlying causes of the deficit are ones faced by other school districts in the state.

Flat state funding and the end of pandemic-era federal relief funds combined with an aging populace, resulting in declining enrollments, have been cited by vastly different Alaska school districts facing deficits.

Accounting errors at Alaska’s Juneau School District add to financial stress caused by demographic and state budget pressure.

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Such factors are also cited by the Anchorage School District, the state’s largest with 43,370 students enrolled in 130 schools, compared to the 4,157 students Juneau has in 13 schools, including a charter school.

“Alaska is one of the fastest aging states in the nation, and Juneau is one of the fastest aging communities in Alaska,” Will Muldoon, who heads the Juneau Board of Education’s finance committee, said in an interview.

“It’s a tough issue statewide, but it’s a little bit more pernicious here,” he said.

“The other piece happening to us, and all of Alaska, is we have a lot of outmigration,” Deedie Sorensen, the school board president, said in an interview. “In Juneau, we have more people over 60 than under 20.”

Juneau is unique in that the size of its deficit resulted from what Sorensen described as “egregious accounting errors” in the numbers shared with the school board when it was building the budget last March. The district’s finance director, Cassee Olin, resigned in December, after Elgee Rehfeld, an Alaskan auditing firm, revealed the errors to the school board in November after completing the annual comprehensive financial report for fiscal 2023.

Superintendent Frank Hauser, who started in July, hired consultant Lisa Pearce in December to manage the budget. She found that the current year budget had overestimated revenues by roughly $5 million and underestimated expenses by $2 million.

The total deficit Pearce originally estimated at $9.5 million dropped to $8.5 million during Tuesday night’s budget workshop, because Pearce said she found $1 million in savings related to health insurance.

The school board approved a budget last year it thought was balanced, but in fact it should have reflected a $1.9 million deficit.

“As a board member, you trust the numbers being presented by the finance officer and the superintendent are correct,” Sorensen said. “It’s not like most school board members have the background to sit behind them and gaze into the spreadsheets and say, ‘this is how I am feeling about the numbers you are giving me.’ We took the numbers to be true.”

The accounting problems come on top of overly optimistic student enrollment projections, Sorensen said.

The projected numbers for the current school year were 4,240 students but the actual count was 4,157, for a difference of 83 fewer students, Muldoon said.

The school district received funding from the state of roughly $5930 per student through 2022, which increased by $30 per student in 2023, after remaining the same since 2017, he said.

“There is no Plan B where we contemplate Chapter 9 bankruptcy,” Muldoon said.

The Alaska Department of Education has given the district a five-year window to close the deficit without penalties. The way that school district financing is structured in Alaska, the DOE can cut funding to the district equivalent to the prior year’s deficit. It has also authorized the school district to explore getting a $5 million, five-year bridge loan.

The only school district in the state’s history to file Chapter 9 bankruptcy was Copper River School District in 1986, which was taken over by the state, and just reemerged as an independent school district three years ago, Muldoon said.

General obligation bonds for Juneau’s schools are carried on the books of the City and Borough of Juneau, according to the regional government’s financial statements. The bonds, rated AA-plus by S&P Global Ratings, are backed by an unlimited property tax pledge, according to an official statement.

Pearce, who now works as a consultant, has worked as a financial officer for several different boroughs, the state’s regional governing structure similar to a county, over the course of her career, Sorensen said.

She spent the Christmas break poring through the budget to craft a more accurate picture of the school district’s financial situation, Sorensen said.

“It’s been a pretty bumpy road since November,” Muldoon said. “If it were just one of these mistakes, there might be some room in between, but them acting in concert makes it really, really difficult for us.”

It couldn’t come at a worse time, as the likelihood of the state increasing its share of education funding seems unlikely, and the borough, which contributes the other portion of state funding is already at the cap of what it can provide to the district under the state’s equalization formula, Sorensen said.

The $13.9 billion budget proposal Gov. Mike Dunleavy unveiled in December offers no increases to spending on K-12 education.

Dunleavy said when he unveiled his fiscal year 2025 budget that his proposal is just a starting point and is likely to change after lawmakers weigh in, but he hasn’t indicated an interest in increasing education funding.

The per-student funding formula known as the base student allocation has not increased in over eight years, despite record inflation, contributing to school district shortfalls. There is also a reduction in the K-12 formula due to declining enrollment numbers.

Between the two, Dunleavy is proposing a $119.5 million dollar reduction in school funding.

Senate Bill 140 has proposed increasing the per student base by $680, but the House majority has suggested dropping that to a $300 increase, which would be less than last year’s one time funding amount of $340, and would mean a decrease of $325,000 in funding to Juneau, Muldoon said.

Proposed Solutions
Cost cutting solutions being contemplated could bring school closures. But if a school is closed, much like a bankruptcy, the school district would not be allowed to reopen it for seven years, Muldoon said. School building operations are paid for by the school district, but they are owned by the City and Borough of Juneau.

Muldoon described three different configurations of how school closures could be enacted that were broadcast online during a school board retreat on Saturday.

The first model involves moving sixth grade to elementary schools and consolidating seventh and eighth grade at one campus. That would let the district close one middle school.

The second model goes a step further and splits elementary grades into kindergarten through third grade schools and grades 4 through 6 schools. That could allow the district to consolidate the services it provides for younger and older elementary students, he said.

A third model that would result in two school closures involves a combination of splitting lower grades and consolidating, Muldoon said. In that scenario, one of the high schools would become a junior high with grades 7-9, while grades 10-12 would attend the remaining high school.

Muldoon said he was hesitant to split up high school grades, “because no other district does that, and I don’t know how that impacts activities and athletics.”

All three models would save money by eliminating staff positions like principals, office staff and nurses. Increasing class sizes could lead to further staff cuts.

Alaska Gov. Mike Dunleavy’s budget promises little respite for struggling school districts.

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“My other concern as we look at this, I would like our administration to do the research on staff reductions,” Sorensen said at a budget workshop Tuesday.

“We have no idea how many retirements there will be. So many of these things, we usually find out in June,” she said.

“That is something we can start looking at,” Hauser said. “We will handle it using attrition as much as we can, to keep that number as low as possible.”

Hauser added that he wanted to wait to make a final decision until after the district receives final numbers from the demographer.

“I want to make sure we know what the numbers are before we go to the state with building closure proposals, because if a building is closed down, it can’t be reopened for seven years,” Hauser said.