State withholds millions from Milwaukee Public Schools over missing audit

Milwaukee Public Schools is several months late in submitting the annual financial audit reports required by statute, and the delay has triggered a litany of consequences. 

The Wisconsin Department of Public Instruction has withheld the district’s June 2024 Special Education Aid payment of $16,623,612. MPS Superintendent Keith Posley resigned last Tuesday.

And Wisconsin Gov. Tony Evers, who was a public school superintendent, then state superintendent of schools, is calling for operational and instructional audits of the district on top of the late financial audit for the 2022-23 school year, which is being conducted by the Chicago-based consulting and accounting firm Baker Tilly.

The federal government also suspended the district’s Head Start funding last month over safety issues. The suspension began on May 21 and runs for 30 days, Wisconsin Watch reported.

Through a spokesperson, Baker Tilly declined to comment on matters related to its client.

Voters in the district just approved $252 million of additional MPS spending by a narrow margin in April. MPS Comptroller Alfredo Balmasedo said he was fired last week, according to the Milwaukee Journal Sentinel. 

Milwaukee Comptroller Bill Christianson has agreed to help the district sort out its financial reporting in the interim as it looks for Balmasedo’s replacement.

“We’re still in the very early stages of determining what MPS’s specific needs are, and how the City of Milwaukee Comptroller’s Office may be able to help address those needs,” Christianson told The Bond Buyer. “It is difficult to say at this point what our top concerns would be.”

Regarding the governor’s call for additional audits, Christianson said audits are a key tool for identifying areas for improvement in internal controls, and “in this situation such audits could help identify areas that need to be strengthened in order to allow MPS to complete timely and accurate financial statements.”

A recently-released report from the University of Illinois-Chicago’s Government Finance Research Center and Merritt Research Services found a direct correlation between audit timeliness and credit strength. Municipal bond issuer audit times have reached a 12-year high due in part to a shortage of auditors, among other factors.

Fitch Ratings assigns MPS an issuer default rating of A-plus and assigned an A rating to the lease revenue bonds issued by the Redevelopment Authority of the City of Milwaukee, both with a stable outlook.

S&P Global Ratings assigns an A-plus rating with a stable outlook to the district’s revenue bonds and a long-term rating and underlying rating of A with a stable outlook to MPS’ taxable pension funding bonds. The pension funding bonds were also issued by the RACM.

The district’s bonds, capital appreciation notes, and promissory notes outstanding on June 30, 2023, totaled $306.8 million, according to an unaudited financial report posted on the Municipal Securities Rulemaking Board’s EMMA bond disclosure website in March.

Moody’s Ratings withdrew its ratings of the district in 2018.

“S&P Global views timely audits and disclosure as essential to our bond rating process, and a positive credit factor,” said Jamie Blansit, associate director at S&P Global Ratings. “We expect issuers to provide us with notice of material changes, to both financial and operational information, as soon as possible, and this can affect our view of transparency and accountability within the creditworthiness.”

Blansit added that contributing factors may be factored into creditworthiness, such as “key person risk” caused by poor succession planning, or “lack of depth of knowledge within the management teams that may delay submissions.”  

Evers said the additional audits are necessary to answer families’ and taxpayers’ questions about the management of the district.

“A similar effort was conducted at MPS now fifteen years ago, but no similar effort has been made since,” the governor said in a Friday press release. “For any meaningful conversation about possible solutions to happen, the first step is to fully identify the extent of the problems. The audits I’m proposing today must be done to drive those future conversations.”

In a statement Monday, Evers said that he is now taking action on his plan to direct state resources toward the operational and instructional audits after the plan drew support from the district’s board of directors and Milwaukee Mayor Cavalier Johnson, among others. 

A spokesperson for Evers said the governor does not require approval from state legislators to direct the necessary funds to the additional audits. The governor, a Democrat, has repeatedly clashed with Republicans who control the General Assembly over the release of funds that both the legislature and the governor have approved across a range of issues.

The governor was awaiting support from the district and the community before moving forward, the spokesperson said. Having now received it, Evers is looking to hire outside, independent auditors with education sector experience and specific expertise auditing classroom settings. 

“By going two steps further than the ongoing financial audit of MPS, we have two goals in hiring these outside, independent auditors, including auditing MPS’ operations and programs and auditing the instruction of our kids and support for educators in classrooms across the district,” Evers said in the statement.