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In a troubling sign that could set the stage for big budget cuts, the East Baton Rouge Parish school system has found itself dipping deeply into financial reserves to pay for its operations.

The state's second largest public school system had to draw from its reserves even though it took in more money and spent less than it had projected for the fiscal year that ended June 30, according to the annual audit  prepared by the firm Postlethwaite & Netterville.

Despite shrinking enrollment, state funding that hasn't gone up, increasing expenses on charter schools and repairs from the August 2016 floods, the school system has managed in recent years to avoid dire financial straits and finish in the black or nearly so.

This past year, the general operating budget, called the general fund, spent more than came in. Unassigned reserves, the money available for emergencies, shrunk from $61.5 million to $53.3 million.

Superintendent Warren Drake has already announced he is looking for ways to trim $30 to $40 million in future spending. He said he plans to come to the School Board in January with proposals.

At the same time, teacher unions and employee organizations are pressing for across-the-board pay raise, the first in a decade. To help fund such increases, they are pressuring the School Board to end the practice of granting industrial tax exemptions. The school system estimates these exemptions cost it $16.9 million in property tax revenue; the year before they were estimated to be $17.5 million in lost revenue.

The 2017-18 fiscal year was the first in years that the school system has failed to come out ahead or almost even in its general fund, which accounts for about three quarters of all its spending.

Auditors presented the audit Thursday to the parish School Board. The board is slated to approve the 316-page document when it holds its regular monthly meeting on Dec. 13.

Most of Thursday’s presentation focused on shortfall in the general fund, which is the source used to pay for most day-to-day operating expenses.

“It is a deficit. But on the bright side, it’s better than what you budgeted,” said Freddy Smith, an auditor with Postlethwaite & Netterville.

Smith noted the school system has a policy that its general fund reserves should represent about 15 percent of spending in that fund. If the school system projections for 2018-19 fiscal year are accurate, its reserves will end the year closer to 10 percent.

Spending from all funds, including the general fund, clocked in at $638.9 million in 2017-18. That works out to about $11,506 per student, up $372 from the year before.

The audit did cite some problem areas.

Auditors found areas of noncompliance and deficiencies when they examined the school system’s student activity funds. Payroll also caught the auditor’s attention.

“We’re recommending an additional review for your retroactive catch-up pay when a person gets a pay adjustment,” Smith said.

And auditors suggested “best practices” the school system should adopt for its procedures for bank reconciliations, collections and disbursements.

Nevertheless, the auditors have issued an "unmodified opinion" saying the school system's basic financial statements are sound.

The school system's finance office for 32 years running has received certificates for excellence in financial reporting from both the Chicago-based Government Finance Officers Association and the Association for School Business Officials, located near Washington, D.C.

Follow Charles Lussier on Twitter, @Charles_Lussier.

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