enlarge Jack Milton/Staff Photographer

The Portland School Committee votes to go into executive session July 25. It is planning its own budget investigation.

AN EMERGING DEFICIT 2006 OCT. 6: City auditors issue a report highlighting problems in the School Department's accounting that "lends itself to errors going unnoticed."

2007 MAY 3: Portland city councilors learn that school officials did not cut $500,000 from the $82 million 2006-2007 budget as ordered. The money was used to hire 25 additional people. MAY 4: Superintendent Mary Jo O'Connor says she instituted spending controls in February and expects the budget to reflect the $500,000 reduction by June 30. ON OR ABOUT MAY 10: According to the city's financial administrator, Paul Colpitts, he notifies the school department's business manager that there is an estimated $2.4 million deficit in the 2006-07 budget. JULY 10: Calling it "regrettable but unavoidable," O'Connor announces that the school department overspent its budget for the previous year by $1.7 million. JULY 13: School officials warn that the 2006-07 budget deficit may climb as high as $2.5 million after auditors complete their review this fall. JULY 17: City and school officials agree on a plan to reconcile the previous year's budget deficit and to institute a budget review process. The School Department deficit will be covered by the city's reserve fund. Dipping into the reserve fund might endanger the city's bond rating, unless it can show that there is a plan in place to prevent future deficits. JULY 30: Portland schools' finance director, Richard Paulson, resigns. AUG. 1: The Portland city manager and school superintendent agree to have the city finance staff take over management of the school budget, at least in the short term.

SCHOOL BUDGET IN THE RED $82 MILLION: Total budget, 2006-07 $2.5 MILLION: Total deficit for 2006-07 $1.1 MILLION: Medicaid payments expected, according to Portland schools Web site $850,000: Amount of Medicaid shortfall, according to Superintendent Mary Jo O'Connor.

When Portland Superintendent Mary Jo O'Connor last month announced the school system faced a deficit, a news release attributed the drop "primarily to an unexpected change in State Medicaid reimbursement and State denial for administrative support for grants."

O'Connor has continued to cite those factors as part of what she calls a "perfect storm" of budgetary circumstances that put the state's largest school district $2.5 million in the red.

But it is a perfect storm that appears to have spared other Maine school departments, which faced the same drop in Medicaid revenues as Portland.

Some administrators in other school districts in Maine say they have been budgeting pessimistically for Medicaid for years, because the funds are so unreliable and subject to unannounced rule changes that can foul up the best budget planning.

In the past week, the controversy led to the resignation of the Portland schools finance director, Richard Paulson, and the city's takeover of school finances, at least for the short term. The School Committee voted to hire a lawyer to conduct its own investigation of the district's budget woes.

O'Connor admits she does not fully understand the revenue shortfall. She repeatedly incorrectly stated several times last week and in an op-ed piece she wrote for a weekly newspaper that the Medicaid funds are used for school lunch programs for disadvantaged students. In fact, these funds are used to pay for medically related costs for low-income special education students.

"I don't know. I can't keep all those financial pieces, nor should I have to," O'Connor said last week when asked to explain in more detail the revenue shortfalls in the budget.

She said the special education director and assistant director, who were both on vacation last week, would be better able to explain the Medicaid shortfall.

According to the 2006-2007 budget posted on the Portland schools Web site, the district, which has 7,000 students and an $82 million budget for that period, expected to take in $1.1 million in Medicaid reimbursements.

Just how much it collected was not available from school officials last week.

Dean Flanagin, business manager for Lewiston schools, the second largest school district in the state with 4,700 students and a $44 million budget, said Medicaid is a notoriously fickle source of revenue.

So, he said, it came as no surprise when the state Department of Health and Human Services, which distributes the federal money, announced in October a change that could result in getting less money.

Flanagin said unexpected changes in Medicaid reimbursement rules are so common that he only counts on receiving half of what the district normally gets when he prepares the spending plan for the coming year. That way, he said, he guards against receiving less money than budgeted.

Last year, for instance, he anticipated $300,000 in Medicaid funds although the district normally takes in $600,000. The district actually took in $495,000.

"They hired me to be the pessimist," said Flanagin.

Other administrators say they have stopped counting on Medicaid funds altogether.

"We kept reading about the situation with Medicaid and we knew something would be happening, so I put into practice that we would not spend any (Medicaid) money until we had it in hand," said Thomas Farrell, superintendent of School Administrative District 71, which includes Kennebunk and Kennebunkport.

Now the district waits until it has actually received the Medicaid money from the Department of Health and Human Services before it is spent, he said. "Our philosophy is we cannot depend on it. We hope we get it and we can certainly use it," he said.

Scarborough, the 10th largest school district in the state,...