How to Tell if a School District Budget is Sustainable

A school district can approve a legally balanced budget and still face serious financial problems.

It can also run a deficit for a year without being in immediate financial danger.

Those statements may sound contradictory, but they reflect the difference between a district’s annual budget, its accumulated fund balance, and its longer-term financial trajectory.

Understanding that difference is essential when evaluating SoWashCo’s one-year budget adjustment and five-year planning process.

Start With the Annual Operating Result

The simplest financial question is:

Does the district expect to receive more money than it spends?

For SoWashCo’s 2026–27 General Fund, the preliminary budget projects:

• Revenue: Approximately $359.1 million
• Expenditures: Approximately $367.1 million
• Deficit: Approximately $8.0 million

The district therefore expects to spend about $8 million more than it receives during the year.

That difference is covered by drawing down the General Fund balance.

A single-year deficit is not automatically a crisis. Districts maintain fund balances partly to absorb temporary revenue disruptions, unexpected expenses, enrollment changes, and other short-term challenges.

The more important question is whether the deficit is temporary or likely to continue.

Temporary Deficit or Structural Deficit?

A temporary deficit occurs because of a limited, nonrecurring event.

Examples might include:

• A one-time facility repair
• A temporary enrollment disruption
• The timing of state or federal payments
• A planned purchase funded with previously accumulated savings
• A one-time transition cost

A structural deficit exists when recurring annual expenses exceed recurring annual revenue.

Examples might include:

• Salaries and benefits growing faster than ongoing revenue
• Enrollment declining while staffing and facility costs remain
• Temporary grants paying for permanent positions
• Continuing programs without a sustainable funding source
• Inflation increasing operating costs faster than state funding

A structural deficit does not disappear when the next budget year begins. Unless revenue increases or recurring expenses decrease, the district will continue drawing down its fund balance.

That is why identifying a deficit is only the first step. The next question should be:

How much of the deficit is recurring?

Fund Balance Is a Cushion, Not a Solution

A fund balance is money accumulated from prior years when revenue exceeded expenditures.

For 2026–27, SoWashCo’s total General Fund balance is projected to decline from approximately $56.3 million to $48.2 million.

That projected ending balance equals approximately 13.1% of annual General Fund expenditures.

At first glance, that may appear to provide a comfortable cushion. But the total includes restricted and nonspendable amounts that are not necessarily available for general operations.

The portion identified as unassigned, assigned, and committed is projected to decline from approximately $45.6 million to $35.9 million.

Fund balance provides time to address a financial imbalance. It does not correct the imbalance itself.

If the district repeatedly spends $8 million more than it receives, the balance will continue to decline. The exact pace will change as enrollment, state funding, compensation, and other assumptions change, but the basic relationship remains:

Beginning fund balance + revenue − expenditures = ending fund balance

A district cannot permanently fund recurring services with a finite reserve. In fact, the district projects the General Fund balance will run out sometime in school year 2028-29 unless adjustments are made:

Source: South Washington County Schools, Budget Adjustment Update presentation dated July 16, 2026.

Not All Fund Balance Is Available

As explained in Part 2, SoWashCo does not maintain one unrestricted savings account.

The General Fund itself contains balances designated or restricted for purposes such as:

• Long-term facilities maintenance
• Operating capital
• Staff development
• Safe schools
• Basic skills
• Student activities
• State-approved alternative programs
• Other legally designated purposes

The district also maintains completely separate funds for Nutrition Services, Community Education, construction, debt service, and post-employment benefits.

A large construction balance cannot ordinarily be used to pay classroom salaries. A healthy Food Service balance cannot automatically cover a General Fund deficit. Money collected to repay debt must remain available for debt payments.

When evaluating financial health, ask:

1. What is the total fund balance?
2. How much is restricted?
3. How much is genuinely available for general operations?
4. How quickly is the available portion projected to decline?

The unrestricted operating balance is generally more informative than the districtwide total.

Fund-Balance Policy

School districts adopt fund-balance policies to establish a minimum financial cushion.

SoWashCo’s policy 701.2 establishes a minimum General Fund balance benchmark of 16.6% of annual expenditures.

Maintaining a reserve helps the district:

• Manage unexpected expenses
• Absorb changes in enrollment or state funding
• Continue operating when payments arrive later than expenses
• Avoid short-term borrowing
• Protect its credit rating
• Respond to emergencies without immediately cutting services

The minimum is not necessarily the ideal operating target. Reaching the policy floor means the district has used much of the protection it previously accumulated.

A responsible long-term plan should therefore stabilize the budget before the balance approaches the minimum—not merely demonstrate that the district remains above it for one more year.

Statutory Operating Debt

Minnesota law also establishes a more serious threshold known as Statutory Operating Debt, commonly abbreviated as SOD.

A district may enter SOD when its year-end negative unrestricted General Fund position exceeds the statutory threshold relative to annual operating expenditures. Currently that threshold is met when its net negative unreserved general fund balance (operating debt) exceeds negative 2.5% of its most recent fiscal year’s operating expenditures. A district in SOD must submit a formal recovery plan to the Minnesota Department of Education and take steps to eliminate the deficit.

SOD is an emergency condition, not a sensible financial target.

A projection showing that the district avoids SOD does not necessarily demonstrate that its budget is sustainable. The district could remain outside SOD while:

• Running recurring deficits
• Falling below its own fund-balance policy
• Reducing its financial flexibility
• Deferring necessary expenses
• Approaching the statutory threshold in a later year

The meaningful question is not simply, “When would the district enter SOD?”

It is:

When must the district act to prevent an unsustainable trend from reaching that point?

Enrollment Assumptions Matter

Enrollment affects both sides of the district budget.

On the revenue side, many state funding formulas are driven by the number and characteristics of enrolled students.

On the expense side, costs do not decline automatically when enrollment falls.

SoWashCo projects average daily membership declining from approximately 19,219 students in 2025–26 to 18,689 in 2026–27—a decrease of about 530 students.

That decline may reduce revenue, but the district cannot necessarily eliminate costs at the same rate. A school still requires a principal, utilities, custodial services, transportation, and a minimum number of teachers even if it serves fewer students.

Enrollment projections should therefore be evaluated alongside:

• Building capacity
• Class sizes
• Staffing formulas
• Open enrollment
• Charter-school enrollment
• Housing development
• Birth rates
• Program demand
• Geographic differences across the district

If enrollment assumptions prove wrong, both projected revenue and planned expenses may need to change.

Multi-Year Forecasts Matter More Than a Single Budget

An annual budget shows what the district currently expects to happen during one fiscal year.

A multi-year forecast shows where those assumptions lead.

Forecasts are not predictions with perfect accuracy. State funding, labor agreements, inflation, enrollment, special-education costs, and other variables will change.

But a forecast remains valuable because it answers an essential question:

If current services and assumptions continue, does the district’s financial position improve or deteriorate?

A useful multi-year forecast should show:

• Projected enrollment
• Revenue by major source
• Compensation assumptions
• Other expenditure growth
• Annual surplus or deficit
• Restricted and unrestricted fund balances
• Fund balance as a percentage of expenditures
• The effect of proposed budget adjustments
• The remaining shortfall after those adjustments

The assumptions should be clearly stated so the public can understand why the forecast changes over time.

One-Time Savings Versus Recurring Savings

Not every budget adjustment has the same long-term value.

A one-time saving improves the budget in one year but does not permanently reduce the gap between revenue and expenses.

Examples include:

• Delaying an equipment purchase
• Holding a vacant position open temporarily
• Using grant money
• Selling property
• Spending restricted or assigned balances
• Postponing maintenance

A recurring saving reduces expenditures in future years as well.

Examples may include:

• Eliminating a continuing position
• Permanently changing a service model
• Closing or consolidating a facility
• Renegotiating an ongoing contract
• Ending or redesigning a continuing program

One-time actions can provide useful transition time, but they should not be presented as permanent solutions to a recurring deficit.

When the district proposes an adjustment package, the public should be able to see:

• The first-year savings
• The recurring annual savings
• Any implementation costs
• Any savings that depend on uncertain assumptions
• The remaining projected deficit
• The resulting fund-balance trajectory

A Balanced Budget Can Still Be Unsustainable

A district can technically balance a budget using:

• Fund balance
• Temporary grants
• One-time savings
• Deferred purchases
• Property sales
• Short-term vacancies
• Other nonrecurring resources

That may produce a balanced document without resolving the underlying structural problem.

Conversely, a planned deficit can be financially reasonable if it reflects a deliberate use of accumulated money for a temporary purpose—such as spending previously issued bond proceeds on approved construction.

The quality of the explanation matters as much as whether the bottom line is positive or negative.

Financial Sustainability Is Not the Only Goal

A district could improve its financial statements by eliminating valued programs, increasing class sizes, deferring maintenance, or reducing services families rely on.

That does not automatically make the plan successful.

Financial sustainability means the district can continue delivering its intended educational program with the revenue it can reasonably expect.

A responsible plan must therefore consider both:

• Financial sufficiency: Does the plan stabilize the budget?
• Educational impact: What services, opportunities, and outcomes will the plan preserve or change?

The strongest proposal is not necessarily the one with the largest immediate reduction. It is the one that establishes a sustainable relationship between resources and the educational experience the community expects.

Questions to Ask About Any Budget Proposal

When evaluating a district budget or adjustment plan, ask:

1. What is the projected annual surplus or deficit?
2. How much of that result is recurring?
3. Which fund is affected?
4. How much fund balance is genuinely available?
5. What happens to the balance over the next several years?
6. What enrollment assumptions drive the forecast?
7. Which revenue and expense assumptions changed?
8. Are proposed savings recurring or one-time?
9. Does the proposal fully address the projected problem?
10. What educational and operational effects accompany the financial change?

If those questions cannot be answered, the public does not yet have enough information to determine whether the proposal is sufficient.

Source: South Washington County Schools, 2026–27 Preliminary Budget, approved June 25, 2026.