Board committee accepts FY23 audit; auditors report unmodified opinion, multiple material weaknesses and $141M city-held deficit

The committee on accountability, finance and personnel of the Milwaukee Board of School Directors voted unanimously Friday to accept the district's fiscal year 2023 audit documents after a presentation from Baker Tilly and district finance staff.

The audit firm issued unmodified opinions on the district's FY23 financial statements and the district's two pension plans, meaning the auditors found no material misstatements in the financial statements. "For 2023, we were able to issue unmodified opinions for the district's financial statements," Baker Tilly principal Wendy Unger told the committee.

Baker Tilly and district staff emphasized that the unmodified opinion on the financial statements does not eliminate other problems found in the audit process. The single-audit work tied to federal and state grants produced findings: auditors reported two federal findings (including issues with ESSER equipment and real property management and a Medicaid ratio reporting error) and one state finding (four teachers in a tested sample not licensed for the AGR program). The single-audit schedule shows a total of 11 findings across financial- and compliance-related work.

Auditors identified multiple material weaknesses and significant deficiencies in district processes. Baker Tilly highlighted a weak year-end close process and issues with audit readiness and timely submissions, which delayed the issuance of audited financials. The firm also flagged that the district's general ledger system allowed deletion of previously posted journal entries, a control weakness that "creates a potential for fraud or errors" and hampers audit trails. Other material weaknesses named included accounts payable and year-end analysis, budget reporting and validation against adopted budgets, and the need for stronger internal controls over capital assets and time-and-effort reporting for grant-funded salaries.

The audit presentation also drew attention to a substantial deficit cash balance the City of Milwaukee holds on behalf of the district. Baker Tilly reported that as of June 30, 2023, the district had roughly $141,000,000 in negative cash with the city; auditors said the immediate cause was timing related to ESSER grant reimbursement claims. Baker Tilly noted that the deficit was still present in later periods and that administration is investigating root causes and possible resolution.

Financial highlights cited by auditors showed governmental funds decreased by about $49.3 million in 2023. The district's general fund decreased by roughly $92.2 million while the construction fund increased by about $43.6 million (including a noted $60 million contribution). Auditors also reported a general fund deficit of about $69.7 million and a nutrition services fund deficit of about $3.3 million; capital projects had the largest restricted/committed fund balance at about $140.5 million. Long-term liabilities remained significant, with a notable shift in the Wisconsin Retirement System position (a $246 million change) and an OPEB liability decline of about $36.8 million.

During public comment, Theresa Fowler, who identified herself as an MPS whistleblower, urged the board to apologize to taxpayers and school families and said the audit reports showed the board and previous administrators "knew of the mismanagement." Deborah Keether criticized repeated and longstanding audit findings, pressing the board on staffing and oversight and referencing a prior $84 million overcharge the district had to repay to the state.

After discussion, Director Zombor moved to accept the attached FY23 audit documents, require administration to return quarterly with progress updates on the audit findings, and to direct the Office of Accountability and Efficiency (OAE), in collaboration with administration, to review the district's fund-transfer and investment policies and bring recommended changes to improve board oversight no later than the June board cycle. The motion passed 5-0 (Herndon, Jackson, Leonard, Zombor, Chair Garcia voting aye). The committee recorded that quarterly progress reporting should allow the board to monitor remediation of the material weaknesses and significant deficiencies.

Next steps identified on the record: administration will provide the committee and the board with quarterly updates on remediation progress; OAE and administration will review fund-transfer and investment policies and return recommendations by the June board cycle.

The audit reports and the auditors' "reporting and insights" document include management responses and a list of proposed material journal entries; Baker Tilly noted there were no disagreements with management recorded in the audit process.