More financial struggles are ahead for the Coupeville School District, which was recently placed on a financial watch list and faces $1.66 million in budget cuts next school year, Financial Director Brian Gianello told the school board last week.

In August, the board authorized Superintendent Steve King to make about $1.45 million in cuts for the current budget that resulted in fierce opposition from members of the community and concerns about the district’s ability to resolve its financial crisis.

Last month, the Coupeville Education Association listed a series of errors in pay and contracts on the district’s part, with some employees alleging they were paid inaccurately. In order to cover January accounts payable and payroll, the board approved an interfund loan transfer of $400,000 from the capital projects fund into the general fund, expecting to repay the loan by April 2024.

In his latest financial report, Gianello announced that the district needs another interfund loan transfer of $800,000 in May to make it through the school year.

Due to a decline in cash balances and cash flow, the district is currently on Northwest Educational Service District 189’s financial watch list, according to the report.

Larry Francois is the superintendent of the local service district, also known as ESD 189. According to him, ESD 189 is currently monitoring 28 of its 35 school districts for similar problems. While Coupeville is not alone, its financial hardships make it particularly stand out.

“I think their situation is a little bit more serious than a number of the other districts that we’re monitoring,” Francois said.

ESD 189 monitors the districts, including Oak Harbor and South Whidbey, on a quarterly basis, tracking their cash balance over time. The list informs the service district of what schools are in need of help. ESD 189 will then provide whatever assistance they need, Francois said.

Services provided by ESD 189 include fiscal monitoring, budget development assistance and technical reporting. The service district also exists as an intermediary between the 35 school districts, the Office of the Superintendent of Public Instruction — also known as OSPI — and the State Board of Education, Francois explained. ESD 189 is one of nine service districts in Washington.

Currently, according to Gianello’s report, there are four schools under “binding conditions,” which is what happens when a district ends the financial year with a negative fund balance or needs to budget receivables collected in the future to balance its budget, according to a presentation by the Washington Association of School Business Officials.

A district that agrees to the binding conditions may return to a healthy financial place by allowing OSPI and ESD 189 to review and recommend financial decisions, according to the presentation.

Once under binding conditions, a school district must meet all requirements and solve its financial situation to be relieved of such binding conditions. If not, it goes into a second year under binding conditions.

During this time, the district must also submit a budget to the Office of Superintendent of Public Instruction — or OSPI, which is part of the service district — every year, according to the presentation.

In the budget submitted to OSPI, expected expenditures can’t exceed expected revenues. If the budget is not balanced, the district can petition to include future revenues.

If after two years the district has not resolved its financial situation or provided a valid plan to do so, it will be referred to the Financial Oversight Committee.

King believes the school is not going to end in binding conditions.

“Districts go into binding conditions when they have to borrow money from OSPI in order to cover district expenses,” King wrote in his email. “ We have been able to avoid that due to being able to borrow from capital projects.”

In January, the board approved an interfund loan transfer of $400,000 from the Capital Projects Fund to the General Fund in order to cover January expenses such as accounts payable and payroll. Now, King wrote, the district estimates it will need up to $800,000 from capital projects in May, “but it may not end up being that much.”

Repayment of the loan must happen within one calendar year and will be included in next year’s budget, King wrote. However, it’s unknown when the district will repay the loan.

Francois said there has been a “tremendous increase” of schools in financial distress in recent years. After the pandemic, many students did not return, choosing instead other learning modalities like online school or private schools, or moving away with their families to a place where the cost of living is more affordable. Lower revenues have also been accompanied by less funds from the state and rising inflation.

Six years ago ESD 189 was monitoring up to 10 school districts, Francois estimated.

Now, many districts have been forced to make budget reductions, with staff reductions often being the first on the list of cuts. At Thursday’s board meeting, two staff members voiced their grievances over the reduction of paraeducators.

The Coupeville School District is also under OSPI Washington Integrated System of Monitoring review related to special education programs. However, according to OSPI Special Education Program Improvement Coordinator Jennifer Story, this doesn’t mean the district is in any trouble.

Every year, OSPI reviews special education programs in the state’s school districts to improve education for students with disabilities. According to Story, OSPI selected to review Coupeville for a “fiscal-only desk review” simply because the last review was conducted in 2016.

“It’s just a routine fiscal monitoring review that we do with a lot of districts every year,” she said. “So it’s not anything that they were selected for due to concerns or issues that had been brought to our attention.”