Fiscal Distress — Schools

When an Ohio school system encounters budgetary problems, it may be placed in fiscal caution, fiscal watch, or fiscal emergency status.

Sidebar
Fiscal Caution, Watch, and Emergency
Fiscal Caution | Fiscal Watch | Fiscal Emergency

In the case of schools, the Ohio Department of Education and Workforce (DEW) and the Auditor of State's Office work together to determine fiscal watch and emergency designations. The agencies work with each affected school district to help keep the financial condition from getting worse. Ohio schools fall into fiscal watch or emergency only after an analysis is conducted by the Auditor of State's Office.

Schools in Fiscal Distress.pdf — Last updated Jan 2025

Fiscal Caution

Declaring Fiscal Caution in a School District

The first category alerting school districts of potential fiscal distress is fiscal caution. The Ohio Department of Education and Workforce (DEW), in consultation with the Auditor of State (AOS), developed guidelines to identify fiscal practices that could lead to financial crisis if uncorrected.

Before declaring fiscal caution, the DEW shall consult with the school board. The school board will be required to provide a written proposal to DEW to correct the fiscal deficiencies, and DEW may go on-site to provide technical assistance. Further scrutiny by the DEW and the AOS may determine that potential problems exist that can trigger fiscal caution.

For more information go to the Ohio Department of Education and Workforce website.

Top of Page

Fiscal Watch

Declaring Fiscal Watch in a School District

The Auditor of State must declare a fiscal watch if the school district meets financial conditions that threaten its solvency. Within 60 days of declaration, the district must develop and submit a financial plan to eliminate the financial crisis, and the DEW must evaluate the plan for approval within 30 days. Fiscal watch provides district officials and the school board control of the plan and its implementation at the local level. The AOS or DEW can provide free technical assistance to the district in developing their plan.

A school district qualifies for fiscal watch if:
  • It has a forecasted operating deficit for the current fiscal year that exceeds 8% of the school district's general fund revenue for the preceding fiscal year and the district has not passed a tax levy to eliminate the deficit in the succeeding year.
  • It has restructured its operating debt while in fiscal emergency and its financial planning and supervision commission has been terminated. The district remains in fiscal watch until the restructured debt is paid off.
  • The district is in fiscal caution but has not acted reasonably to correct the noted fiscal problems and the ODE determines that a fiscal watch declaration is necessary to prevent further fiscal decline.
  • It has a forecasted operating deficit for the current fiscal year between 2% and 8% of the school district's general fund revenue for the preceding fiscal year, the district has not passed a levy to eliminate the deficit in the succeeding fiscal year, and the AOS determines there is no reasonable cause for the deficit or that declaring fiscal watch is necessary to prevent further fiscal decline.

Fiscal Watch Termination

The school district must request release from fiscal watch by sending a letter and board resolution to the State Superintendent of Public Instruction and the Auditor of State.

  • The Ohio Department of Education and Workforce will:
    • Determine whether the district has met the requirements of its financial recovery plan, including alleviating the conditions that led to the declaration of fiscal watch; alleviating any conditions and discontinuing any practices identified by the Auditor of State that could lead to the declaration of fiscal caution; and providing the Auditor of State with a written summary of its findings.
    • Notify the Auditor of State whether it supports the Board of Education's request for release, based on its review and analysis of the district.
  • The Auditor of State will:
    • Determine whether the district received an unqualified opinion on the most recent audit of its financial statements and that the statements were prepared in accordance with generally accepted accounting principles.
    • Determine whether the compliance and management letters issued as part of the most recent audit contain no material issues relating to accounting policies and procedures that could negatively affect the financial recovery or condition of the district.
    • Examine the district's five-year forecast. To be eligible for release from watch, the forecast must be based on the board's most likely course of action and demonstrate that the district will avoid all fiscal watch conditions for the current and ensuing fiscal year. The district also must receive an unqualified opinion from the Auditor of State.
    • Make a determination regarding release from fiscal watch and notify the school district and the DEW.
  • For a school district in fiscal watch because it issued securities under Ohio Revised Code (ORC) § 3316.041 or § 3316.06, termination from fiscal watch will occur:
    • Upon termination of its financial planning and supervision commission.
    • After repayment of the restructured or refinanced debt.
    • If an analysis of the five-year financial forecast determines it is reasonable to expect the district to avoid a deficit in the current and ensuing fiscal year. If the DEW deems it necessary, it may request an examination of the forecast by the Auditor of State.
    • If the Auditor of State has received notification from the DEW that an examination of the district's five-year forecast is not necessary; or the district has prepared a five-year forecast, the forecast indicates that the district will not have a deficit balance for the current and ensuing fiscal years, the Auditor of State has examined the forecast, and the Auditor of State has rendered an unqualified opinion.

Top of Page

Fiscal Emergency

Declaring Fiscal Emergency in a School District

A fiscal emergency is the last and most severe stage of a school district's financial solvency problems. Following a declaration by the Auditor of State, a Financial Planning and Supervision Commission is created that may assume all or part of the powers of the board of education. The commission develops a financial plan to alleviate the school district's financial crisis.

Any one factor is needed for the Auditor of State to declare a fiscal emergency:
  • A forecasted operating deficit for the current fiscal year exceeding 15% of the school district's general fund revenue for the preceding fiscal year, and the district has not passed a levy to eliminate the deficit in the succeeding fiscal year.
  • A school district in fiscal watch fails to submit a recovery plan that is acceptable to the DEW within 120 days of the date of a fiscal watch declaration, or an updated plan when one is required.
  • A school district in fiscal watch is not materially complying with the provisions of an original or updated recovery plan and the DEW has determined that declaration of a fiscal emergency is necessary to prevent further fiscal decline.
  • A school district in fiscal watch has restructured debt under ORC § 3316.041 and the school district further experiences an operating deficit, fails to comply with the terms of the recovery plan, or fails to submit an acceptable updated plan when required.
  • A forecasted operating deficit for the current fiscal year between 10% and 15% of the school district's general fund revenue for the preceding fiscal year, the district has not passed a levy to eliminate the deficit in the succeeding fiscal year, and the AOS determines that declaring a fiscal emergency is necessary to correct the district's fiscal problems and prevent further fiscal decline.

Fiscal Emergency Termination

  • All fiscal emergency conditions have been eliminated, and no new emergency conditions have occurred.
  • An effective financial accounting and reporting system is being implemented, with the expected completion within two years.
  • The financial recovery plan objectives are being met.
  • The examination of the school district's five-year forecast includes a nonadverse opinion rendered by the Auditor of State.

Top of Page

Financial Planning and Supervision Commission

Members of the Financial Planning and Supervision Commission

  • Director of the state Office of Budget and Management (or representative)
  • Director of Education and Workforce
  • District parent with a child currently enrolled, appointed by the State
  • District resident (by home or business) with financial expertise, appointed by the Governor
  • District resident (by home or business) with financial expertise, appointed by the Mayor
  • Three appointed members are to be identified within 15 days of the declaration of a fiscal emergency. The commission will include women and at least one African-American or Hispanic if those minorities compose 20% of the district student population.

Basic Responsibilities of the Commission

  • Adopt within 120 days of first meeting a financial recovery plan to eliminate fiscal emergency conditions, balance the budget, avoid future deficits, and restore the school district's ability to market long-term obligations.
  • To achieve the above goals, the commission may assume any powers of the school board it considers necessary, including those related to personnel, curriculum, and legal issues.
  • Require the school district board to establish monthly levels of expenditures and obligations consistent with the recovery plan. If necessary, restructure or refinance outstanding district debt during fiscal emergency once a levy is passed.

Auditor of State Responsibilities

The Auditor of State serves as an advisor to financial planning and supervision commissions for all school districts in a fiscal emergency. In this role, the office provides accounting training and assistance, and monthly monitoring of the school district's financial activity to ensure compliance with the recovery plan and various accounting rules and reports. The office reports periodically to the commission on the status of the school district's progress.

The Auditor of State also routinely conducts performance audits of school districts immediately after a fiscal caution, fiscal watch, or fiscal emergency declaration. Through these operational assessments, auditors provide cost-saving recommendations to help commissions develop recovery strategies. These audits are completed at no cost to districts in fiscal caution, fiscal watch, or fiscal emergency.

Top of Page