This measure shows the percent of district revenues not spent in the year received for each of the most recent 2 years. A negative ratio indicates that the district spent more money than it received for the year. A district with below-average operating reserves exposes itself to higher financial risk each time its spending exceeds its revenues.

If a district’s operating margin ratio was -10 percent, the district spent 110 percent of its revenue in that year. When annual spending exceeds revenues, districts are generally able to use operating reserves (i.e., fund balances) built up in prior years to meet current spending needs. However, when a district has little or no operating reserves, such spending can result in a negative balance.

A district’s General Fund balance could be negative due to misallocation of State or local tax revenues between funds or budgetary overspending Budgetary overspending is spending beyond statutory budget limits and may or may not cause districts to have negative fund balances. Districts can spend from certain funds, such as the Maintenance and Operation Fund, based on statutory budget capacity even when cash is not available. However, when a district spends beyond its budgetary spending capacity, it often spends beyond its available cash and reports a negative fund balance. Spending within budget limits is covered in the 2 other Budget limit reserves measures: Operating and Capital budget limit reserves. . Districts with negative operating reserves that do not have frozen tax rates may be able to work with their counties to levy additional taxes A.R.S. §15-992(G)(8) and (10) allow districts’ levies to be adjusted to compensate for understated ADM in a prior year or identified cash deficits from prior years when recommended by the County School Superintendent and approved by the County Board of Supervisors. .

All districts with a negative operating margin ratio could be considered at higher risk for this measure. However, to recognize that negative operating margins present less risk for districts with larger fund balances, we limited the districts considered high risk for this measure to those with a negative operating margin ratio in either of the most recent 2 years and a fiscal year 2022 per pupil General Fund ending balance less than 25 percent of the State-wide average.

General Fund amounts were obtained from districts' audited financial statements or unaudited annual financial reports A.R.S. §15-904 requires all districts to annually prepare an AFR, including beginning and ending balances, revenues, expenditures, and other financing sources and uses, including transfers, by fund along with other financial information. Districts are required to submit these unaudited AFRs to the Arizona Department of Education (ADE) by October 15 each year, and ADE publishes them on its website at http://www.ade.az.gov/Budget/EntitySelection.asp to provide district financial information to stakeholders. (AFR) as indicated below. Districts that are not required by State law to receive an annual audit A.R.S. §15-914 requires a school district with a Maintenance and Operation Fund adopted expenditure budget of $700,000 or more to contract for an annual or biennial financial statement audit. Biennial audits are audits of 2 fiscal years performed after the second year. Audited financial statements are due March 31 each year as applicable, 9 months after the June 30 fiscal year-end. generally do not prepare annual financial statements. However, all school districts are required to prepare AFRs each year. To analyze similar data when AFR data was used, we looked at the funds most commonly included The funds most commonly reported as being included in districts’ general funds in their financial statements include the Maintenance and Operation, Auxiliary Operations, Indirect Costs, Impact Aid, and School Opening Funds. Some districts may include additional funds in their General Fund for financial statement reporting based on Governmental Accounting Standards Board requirements. in districts’ general funds in financial statements. However, financial statement and AFR amounts may not be consistent for the same funds if auditors identify adjustments that are reflected in financial statement amounts to correct errors or meet governmental financial statement reporting requirements. To avoid distorting the measure ratios based on reporting inconsistencies between unaudited AFR data and audited financial statement data, we did not compare data across those sources.

• Fiscal year 2022: Amounts were obtained from unaudited district AFRs submitted to ADE as of December 19, 2022.
• Fiscal year 2021: Amounts were obtained from district-submitted audited financial statements, if available. Otherwise, amounts were obtained from district AFRs submitted to ADE as of December 19, 2022.