Steel Valley school directors got some bad news Monday night when auditors told them the district is not operating with a balanced budget and that a tax increase for next year is a virtual certainty.

Betsy Krisher, a partner with the auditing firm of Maher Duessel, reviewed the firm's draft audit report for the board's finance committee and informed the board that it had overspent its general fund budget in 2007-08 by $349,266.

She warned that if a similar scenario exists this year, "you won't have any fund balance left all."

To cover the overspending in last year's budget, the district used money from its fund balance, which now sits at $243,068.

"You have to balance in 2008-2009 or you will be in the red. There is no cushion," Ms. Krisher told the handful of board members who showed up for the finance committee meeting along with Superintendent William Kinavey and Director of Operational Services Mark Cherpak.

On top of that, there was more bad news. Local tax revenues appear to be about $1.6 million below the levels projected in 2008-09. That caused some board members to question how the revenue projections in the budget were devised.

School Director Susan Ballas asked Ms. Krisher if she found this to be the case in other school districts audited by her firm.

"No, we did not find that," Ms. Krisher responded.

Solicitor Donald Fetzko said part of the decline in real estate tax revenues could be due to reassessments won for some properties at the Waterfront.

Another hole in the dike for the budget was a $103,443 deficit in the food service operation as of June 30, 2008, that is detailed in the draft audit report received by the board.

"The cafeteria operation is designed to be self-sustaining; however, funds are provided by the general fund whenever revenue is lagging from the state and federal subsidies," the report said.

The report said expenses increased "dramatically" in 2007-08 due to economic conditions that included fuel surcharges and other cost increases.

The audit report said the district planned to improve the food service finances by increasing prices -- which was done this year -- and improving service contracts.

Later during the board's voting meeting, director Beth Cannon questioned whether two part-time food service employees the board was poised to hire would receive health benefits from the district.

No one appeared to have a clear answer to that question.

The draft audit report predicted future tax increases will be necessary to balance the district's budget and Ms. Krisher told the board that it needed all of the revenue it received from the tax increase it levied for the 2007-08 school year. That year the board increased taxes from 18.92 mills to the current 21.21 mills.

During the board's action meeting, which followed the finance committee meeting, Mrs. Cannon asked Mr. Cherpak to give a report from the finance committee meeting on the dire financial situation facing the district to fill in the public and board members who didn't attend.

When Mr. Cherpak started to give a report, he was cut off by school Director Edward McCallister who said that because the finance committee meeting was open to the public, the board did not need to provide a synopsis.

Mr. Fetzko said Mr. McCallister was correct. As a result, Mr. Cherpak did not continue.

The draft audit report mentioned, and Ms. Krisher pointed out, that during the audit process several significant adjustments had to be made to the district's records. Mr. Krisher said she surmised that this was because Mr. Cherpak, who was hired a year ago, was new in the job and not familiar with accounting practices for public schools.

Mr. Cherpak previously worked as a finance manager at the University of Pittsburgh Medical Center. Ms. Krisher said Mr. Cherpak was cooperative during the audit process, gave auditors access to all information they needed and she predicted there would be no problems with next year's audit.

In addition to the financial matters outlined in the draft audit report, the written report mentioned two other accounting issues. One involved the I-TEAM, a nonprofit agency that provides academic enrichment and mentor services to Steel Valley students and is funded by the Steel Valley Foundation.

The audit report said the I-Team lacked adequate documentation on contributions from the Steel Valley Foundation and how they were spent and recommended that the foundation require more documentation.

The report also recommended that the foundation reconsider its decision not to go through the bidding process when spending funds. The report said the school district obtained a letter from its solicitor precluding the foundation from bidding requirements.

But the auditors in their draft said they "believe the matter continues to warrant further attention, as the foundation was formed to benefit only the school district."

The draft report pointed out that in fiscal year 2008, bids were not solicited for any capital purposes of the foundation.

This could soon become an issue within the district as the foundation is on the verge of embarking on a $3 million addition to Barrett Elementary that will include four new classrooms and a gymnasium.

The money for the project was donated by William Campbell, a Homestead native who is chairman of Intuit Inc., via the Steel Valley Foundation.