El Paso ISD may declare financial emergency, layoffs after review finds $52.8 million budget deficit

From El Paso Matters:

A public school consultant is recommending that the El Paso Independent School District declare financial exigency — similar to bankruptcy for educational institutions — and initiate a stabilization plan that could include mass layoffs in the face of an unexpected budget shortfall for the current school year.

EPISD officials said the district is on track to spend $52.8 million more than it will make in revenue for the 2025-26 school year, after discovering significant systemic issues in how it was tracking its finances, the school board was told Tuesday.

The $547 million budget adopted by the school board in June 2025 had called for a $6 million deficit, to be covered out of the district’s reserves. The budget was developed by then-Superintendent Diana Sayavedra, who resigned that month when it became clear she didn’t have support from a majority of the school board.

“El Paso Independent School District is currently experiencing significant structural financial pressure resulting from recurring expenditure growth outpacing recurring revenue growth over multiple fiscal years,” according to a presentation to the board by MoakCasey, an Austin-based public school consulting firm the district hired to conduct an audit this month. “Analysis conducted during this engagement indicates that the district’s current financial condition reflects both immediate operational pressures and longer-term sustainability concerns requiring accelerated corrective action.”

The presentation recommends that the district declare financial exigency, a rare declaration by a school district that its financial resources can’t support its instructional programs or finance the full compensation of staff for the current or next fiscal year.

The auditors didn’t specifically mention layoffs, but it is clear that they believe such a step will be necessary. The district’s payroll in 2025-26 exceeded the budgeted amount by nearly $22 million, auditors found.

They recommend the district “establish clear, quantified budget reduction goals for the 2026-2027 fiscal year – grounded in recurring revenues, not one-time fixes.”

Without significant changes to its spending, the district could nearly deplete its savings by the end of the next school year, according to the presentation.

Superintendent Brian Lusk and Deputy Superintendent David Bates briefed the school board and the public at the meeting on the causes of the overspending and its implications.

In an interview with El Paso Matters ahead of the board meeting, Lusk said EPISD’s former chief financial officer, Martha Aguirre, who resigned earlier this month, deliberately withheld information on the budget from the superintendent and school board.

“We were not given accurate information or data to tell us where we stood. We were not neglectful and were really aiming at understanding. Just weren’t given clear information as to where we were,” Lusk told El Paso Matters.

Aguirre, who officially resigned May 6, did not respond to El Paso Matters’ request for comment. She served as interim superintendent last year before Lusk was hired in December.

The board didn’t take action on the recommendations to declare financial exigency, but board members said they wanted to move quickly to develop accountability.

The district budget for 2026-27 must be adopted by the end of June, creating a tight window for making what almost certainly will be deep cuts to current plans for the budget.

District leaders initially told El Paso Matters they were expecting a $38.7 million deficit, which ballooned to $52.8 million after MoakCasey did more analysis.

This is expected to wipe out much of the district’s savings, reducing its unassigned fund balance from $101 million to $60 million, leaving it with enough funding to keep running for about 38 days in an emergency.

The district estimates that without significant expense reductions, it would run a $42 million deficit for the 2026-27 school year, which would dwindle its savings down to $18 million, or enough to run for less than 12 days.

Texas school districts need enough reserve funds to run for at least 75 days to get an A in the Financial Integrity Rating System of Texas. Districts that get a failed rating multiple years in a row risk losing their accreditation.

Trustees questioned what kind of accountability there will be for employees who withheld information about the budget and contributed to the unexpected deficit.

“This is going to fall on the back of students and teachers, so what kind of accountability is there, I mean is there any? Is it negligence?” Trustee Mindy Sutton asked.

“Yes,” Bates responded.

EPISD staff said the issue was caused by employee negligence but are unsure if the district has enough information yet to give the board legal advice and recommendations.

Bates and Lusk said administration plans to work quickly to give the board a recommendation before adopting the budget for the coming school year.

Stabilization plan

The district’s financial issues are the result of “the cumulative impact of delayed intervention, fragmented accountability, unrealized budget assumptions, recurring expenditure growth, and insufficient alignment between operational decisions and long-term financial sustainability,” according to a brief from MoakCasey provided to the board.

One issue identified by the auditors is that employee salaries make up about 87% of EPISD’s operating expenses, giving the district little wiggle room for cutting costs. The district’s payroll expenses exceeded its revised budget by about $21.8 million, according to the presentation.

It also noted that the district’s self-funded health insurance program had become unsustainable and was relying on spending from the general fund to stay afloat.

To get EPISD’s finances back under control, MoakCasey recommended the district enact an immediate financial stabilization plan in the next 90 days to cut spending and commit to a long-term recovery plan that outlines its goals for the next five years.

As part of the plan, the firm recommended EPISD declare financial exigency, tighten its restrictions on spending, and review its staffing needs to align them with enrollment trends and the district’s ability to pay for them.

MoakCasey also recommended that the district adjust its health insurance program to ensure it is self-sufficient and does not need money from the fund balance to stay afloat, which could lead to increases in employees’ contributions and premiums.

‘Things that didn’t add up’

EPISD officials told El Paso Matters they were unaware of the skyrocketing deficit until Bates took over as interim chief financial officer May 8, two days after Aguirre resigned. Like Lusk, Bates came to EPISD from Dallas ISD.

Bates said the deficit increased because fewer students enrolled than were projected in the budget, and because the initial budget was adopted with incorrect assumptions about savings from vacant positions. He did not give specific details in an interview with El Paso Matters.

“We discovered that we were adopting a budget at the beginning of the year with some carryover money, with lapsed salaries, and with some amendments to staffing. The (actual) revenues and the expenditures just didn’t align. Also, the amount of kids we budgeted for, we didn’t quite get,” Bates said.

Lusk said there were also instances when employees were hired, and changes were made to the budget without first going to the board for approval.

The outside auditors found the district spent $11.2 million that was not accounted for in the budget. This includes almost $3 million in health savings account distributions, $2.4 million for changes in special education staffing guidelines, $681,000 to give employees an incentive to give an early notice of their plans to retire or resign, and $477,000 for leadership changes, among others.

They also found that the district budgeted $10.3 million in savings that were never realized.

The 2025-26 budget approved by the school board included a projected enrollment of 47,121, a decline of about 1,000 students from the prior year. That was in line with enrollment declines in recent years, according to enrollment data reviewed by El Paso Matters.

But the district’s actual enrollment this school year was 46,244, a decline of almost 1,900 students, according to state data released in March.

Because state aid is tied to student enrollment, the decline of almost 900 fewer students and a decline in average daily attendance of more than 1,000 fewer students that budgeted meant the state provided $10.6 million less in state funding than budgeted, the board was told Tuesday.

The actual trends on key budget drivers like enrollment and expected payroll savings from vacant positions were known by the fall of 2025. Usually, school districts make mid-year budget changes to adapt to actual figures, but that didn’t happen in EPISD, Bates said.

“So there’s a lot of things that didn’t add up throughout the course of the first semester, prior to us arriving, that would be typical for any district that they could kind of right the ship along the way. Well, the ship kind of went off course,” he said.

Bates said the new district leadership had focused this spring on developing a budget for the 2026-27 school year and didn’t see a need to examine the current year’s performance “based on the numbers that we were receiving in senior staff meetings.”

After Aguirre resigned May 6, Bates said he looked at the numbers for the current school year and discovered the huge emerging deficit.

District officials said the 2026-27 budget likely won’t include pay raises.

EPISD Board President Leah Hanany said multiple factors played a role in the exploding deficit.

“I don’t think that you can put this on any one person in the organization. There must have been multiple people who were aware. So, there is definitely a systems failure and control somewhere that we expect to be addressed as a board,” Hanany said.

Hanany said the board chose Aguirre to serve as interim superintendent as the district transitioned leadership because they wanted someone who could focus on balancing the budget.

“The impetus for choosing the CFO at the time was because there could be somebody in the interim role that had the natural capacity to understand the finances,” she said.

Bates said the district hoped to chip away at the deficit by selling some of its land and buses and taking in grants before the end of the fiscal year on June 30.

Despite these newly discovered budgetary challenges, EPISD plans to ask voters to approve a nine-figure bond issue in November to improve its aging facilities and upgrade outdated air conditioners.

Voter approval of a bond issue could increase property taxes for homeowners and commercial properties. Lusk said the district will need to be transparent with voters about the district’s financial challenges and its need for improvements.

“We want to be open and upfront about what our financial landscape is. I think if we keep demonstrating that consistently over time, while not everything will be perfect, the community will realize that we will be honest about where we are,” Lusk said.