The Minneapolis school district is back in a deep and familiar hole: It's facing a $19.6 million budget deficit for the 2020-21 school year.

District leaders are attributing the projected gap largely to declining enrollment and revenue that hasn't kept up with inflation and rising operating costs.

The gap would have been $32 million, but district leaders pulled $8 million from budget reserves. Money can be pulled from the reserves without board approval, according to district officials. Another $4 million came from money set aside to replenish the district's rainy-day fund.

District officials said they have been reserving money as a backstop against future shortfalls. "Over the past two years we have been setting money aside in the assigned fund balance because we knew in the future we would have a budget gap," district Chief Financial Officer Ibrahima Diop said.

So far it is not clear how the shortfall — which represents about 3.2% of the $619 million general fund budget — would impact schools and programs next school year. District officials said they are preparing recommendations that will be presented to the board in February, then will gather feedback from the community before final budget decisions are reached in early spring.

St. Paul Public Schools officials have yet to release their budget forecast.

Last spring, Minneapolis district leaders erased a $33 million shortfall — the largest gap in the school system's recent history. This school year served as a short break from chronic shortfalls that have long dogged the state's third-largest school district.

This new shortfall comes after a $30 million voter-approved property tax increase in November 2018 for new technology and other district expenses.

District officials are blaming the state and federal governments for not spending enough on local public schools.

Minneapolis Superintendent Ed Graff noted at a district finance committee meeting last month that his district has been forced to spend $57 million on special education services and up to $12 million to help serve English language learners, costs he says the state and federal government should be paying more for.

Meanwhile, the district is also getting pinched by charter schools that are siphoning away students and the state aid that follows them. A Star Tribune analysis of enrollment data found that about a third of Minneapolis school-age kids opt for charter schools or schools in neighboring districts. The amount of money the district paid to charter schools to educate Minneapolis students rose from $8 million in 2012-13 to $15 million in the 2018-19 school year.

Diop said he cannot prevent a budget gap if the district keeps losing students and overspending. As of Oct. 1, preliminary enrollment data shows that enrollment in Minneapolis Public Schools was at 33,380, the lowest number in years.

In November, Graff released a five-year forecast showing the fiscal health of the district based on enrollment trends and expected changes in revenue and expenses. Even after a balanced budget which takes into account a 2% increase in per-pupil state funding, district spending will outpace revenue, driven partly by enrollment losses and higher labor costs.

As costs rise over the next few years, deficits are projected to grow much larger, eventually depleting the general fund by 2023.

Graff said he is hoping his strategic plan, which the board is expected to vote on in April, will bring spending in line and prevent the district from collapsing.

Audit highlights

The projected deficit comes on the heels of a yearly audit, which made public the district's spending practices in 2018-19 school year.

The audit raised only two areas of concern, a big improvement from previous years when many more problems were found. The auditor pointed out that some employees were performing accounting duties they weren't authorized to do or didn't have the skills to do. Some employees are also charged with recording transactions and "reconciling balances" at the end of the year without oversight, the audit found.

Diop blamed some of the missteps on turnover in his department and fewer staffers doing more work.

The audit, for a few years in a row, also has called into question the budget process and accuracy of the reports the board receives to adequately monitor the district's finances. Independent auditor Matt Mayer of BerganKDV found that the district was overbudgeting for some expenses and then making amendments midyear.

In 2018-19, the district spent about $48 million less than it had budgeted. The audit also found that the financial stability of the district is improving. The district's rainy-day fund account is growing and has almost reached levels recommended by the board.

"This is a clean audit and the best one compared to the last five years," Diop said. "Because of our work, credit agencies have upgraded the district outlook from negative to stable."

Correction: Previous versions of this article mischaracterized two aspects of independent auditor Matt Mayer's findings: He found that in 2018-19, the Minneapolis School District spent about $48 million less than it had budgeted. He also found that the district was overbudgeting for some expenses and then making amendments midyear.