State rejects Ketchikan school budget, says it will withhold funding as payroll crisis deepens

By SUZANNE DOWNING

Feb. 27, 2026 – The financial crisis inside the Ketchikan Gateway Borough School District escalated this week after the Alaska Department of Education and Early Development formally rejected the district’s FY2026 operating budget and announced it will withhold state funding until the budget complies with state law.

The move comes just days after Borough officials were informed that the district did not have enough cash on hand to make payroll.

In a letter signed by DEED’s School Finance Manager Lori Weed, the letter notified the School Board that the FY2026 budget was rejected under 4 AAC 09.120 for failing to meet Alaska’s balanced budget requirement. Specifically, the department cited a negative ending reserve fund balance of $3.8 million and the absence of a sufficient plan to resolve the deficit.

Until a revised budget is approved, the state will withhold foundation funding and student transportation funding.

If state aid is withheld, the district’s cash position could deteriorate even faster.

The crisis traces back at least three years.

The school district accumulated roughly $4.5 million in unpaid health care costs owed to the borough and entered into a Memorandum of Agreement promising to pay current obligations going forward.

Instead of restructuring spending, the district reportedly covered health costs by shifting money from other funds. A November audit revealed approximately $5.4 million in accumulated debt to the borough, debt that had not been clearly presented.

Notably, November marked the first time the borough and school district shared the same auditor; once the auditor identified the scope of the district’s liabilities, the borough manager informed the Assembly.

Former mayor and current Assembly member Rodney Dial says the problem was not presented clearly to the School Board.

“For fairness, district debt was not presented in a clear or conspicuous way, and the school board was likely unaware,” Dial wrote this week in a column in The Alaska Story. “However, the district’s business office should have flagged this as a significant issue.”

Around the time of that audit revelation, the district’s leadership has unraveled. The superintendent resigned. The business manager resigned. An interim superintendent briefly stepped in and quickly resigned. Last year, three school board members resigned amid an ongoing recall effort — a recall that began before the full extent of the $5.4 million liability was publicly known.

This week the crisis became immediate. The borough manager informed the Assembly that the district was $1,421,000 short of meeting payroll due Feb. 27.

Dial characterized the situation as unprecedented in local history.

The borough manager transferred approximately $4.5 million back to the district to prevent payroll from bouncing, funds that had been encumbered to ensure payment of health care obligations under the earlier MOA.

The district has asserted that without the transfer it could not meet payroll.

The underlying tension remains unresolved: The district owes the borough roughly $5.4 million. If health-related funds are officially designated as such, the Assembly could arguably sequester those funds under the MOA. But if the district runs out of cash entirely, the borough, as the governing body, could face legal exposure.

DEED’s letter significantly raises the stakes. If state aid is withheld and reserves are depleted, the borough’s own financial stability could be jeopardized.

Dial is calling for immediate action, including reductions in force, school consolidation, and a fully transparent financial reset.

“The time for action is now,” he wrote in his column, which was published before the state’s letter arrived. “The longer it takes, the worse it gets.”

Rodney Dial: Ketchikan schools can’t make payroll this week?