Financial position – General Fund operating margin ratio
For our analysis, we look at 3 different measures to determine a district’s financial position: change in fund balance, operating margin ratio, and operating reserve ratio. Each of the 3 measures analyzes components of a district’s General Fund revenues, expenditures, and ending balances to identify potential risk related to General Fund resources. Although each of these measures looks at similar financial data, they focus on different relationships in that data. We assessed each measure individually to ensure that concerns present in 1 or 2 of the measures were not overlooked based on less concerning results for another measure.
Beginning in FY 2020, districts received COVID-19 federal relief grants with less restricted allowable uses than most other federal or State grants. Some districts’ financial position measures may have improved when they used federal relief monies for allowable spending, including maintaining operations , that might have otherwise been paid from the General Fund, contributing to larger General Fund balances than they likely would have without these federal relief grants. In total, State-wide district General Fund balances continued to increase in FY 2022, increasing 32 percent since FY 2020. In FYs 2020 through 2022, nearly half of Arizona school districts reported using at least some of their federal relief monies for allowable grant purposes in place of available State and local monies (see the District, charter, and ADE COVID-19 spending special report).
What is this measure telling me, and why is it important?
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.
Tell me more about operating margin.
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 . Districts with negative operating reserves that do not have frozen tax rates may be able to work with their counties to levy additional taxes .
How were districts identified as high risk for this measure?
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.
|Per pupil General Fund ending balance|
|*Calculated the per pupil amount for each district and then averaged, excluding districts with extreme values that would skew the average.|
How was this measure calculated?
|(General Fund total revenues-General Fund total expenditures)||= Operating margin ratio|
|General Fund total revenues|
General Fund amounts were obtained from districts' audited financial statements or unaudited annual financial reports (AFR) as indicated below. Districts that are not required by State law to receive an annual audit 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 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.
Districts at high risk for this measure
|District||Among the highest-risk districts||County||FY 2022||FY 2021|
|Agua Fria UHSD||Maricopa County||-7.3%||1.3%|
|Apache Junction USD||Pinal County||-7.6%||-0.5%|
|Avondale ESD||Maricopa County||-1.3%||3.0%|
|Benson USD||Cochise County||-3.1%||2.4%|
|Blue ESD||Greenlee County||-48.5%||-7.6%|
|Buckeye UHSD||Maricopa County||-3.2%||-0.8%|
|Colorado River UHSD||Mohave County||0.9%||-1.6%|
|Congress ESD||Yavapai County||-9.5%||3.5%|
|Dysart USD||Maricopa County||-1.0%||-1.4%|
|Flagstaff USD||Coconino County||-3.8%||-7.1%|
|Hayden-Winkelman USD||Gila County||-1.6%||19.6%|
|J.O. Combs USD||Pinal County||-0.3%||-29.5%|
|Kingman USD||Mohave County||-6.2%||-4.8%|
|Laveen ESD||Maricopa County||-1.5%||0.5%|
|Maricopa USD||Pinal County||-4.4%||1.0%|
|Nadaburg USD||Maricopa County||-7.4%||3.3%|
|Osborn ESD||Maricopa County||-6.9%||7.0%|
|Saddle Mountain USD||Maricopa County||-1.4%||4.4%|
|San Fernando ESD||Pima County||-46.1%||-137.7%|
|Skull Valley ESD||Yavapai County||-0.8%||10.9%|
|Tonto Basin ESD||Gila County||-7.1%||9.0%|
|Yarnell ESD||Yavapai County||2.3%||-7.1%|